The euro fell back late yesterday on the foreign exchange markets, following a report that EU finance ministers would discuss "all possible ways" to combat the euro's rise.
However, despite the concern of the finance ministers and a warning against currency volatility from the weekend G7 meeting, many analysts still believe that further dollar weakness lies ahead.
Early yesterday there had been little sign of any easing of upward pressure on the euro on the foreign exchange markets, following the weekend statement from G7 finance ministers. The euro rose to over $1.2750 in early trading, but fell back later after the Dow Jones news service reported an unnamed EU official indicating that EU ministers would discuss how to stop the euro's rise.
The finance ministers from the euro-zone states were meeting last night in Brussels, ahead of a meeting today of the full group of EU finance ministers.
Earlier market trading had indicated a limited impact from the weekend G7 statement. It had warned: "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth". It also clarified that an earlier call made for currency flexibility referred to countries that currently inhibit such flexibility, seen largely as a message to China to loosen the link of the yuan to the US dollar.
While EU finance ministers and central bankers expressed their pleasure at the statement, market analysts remain convinced that the US administration is content to see the dollar slide to help boost US growth and exports. In early trading yesterday, the dollar fell to a two-week low against the euro, while sterling touched $1.8628 - its highest level against the US currency for 11 years.
The G7 statement was "sufficiently ambiguous for everyone to claim a measure of victory", according to Mr Austin Hughes, chief economist at IIB Bank in Dublin. However, he said that despite the warnings against volatility, a rise in the euro to $1.30 remained "a significant risk" in the weeks ahead, with the G7 statement doing little to change the trading positions.
Later the Dow Jones report led to a change of direction, sending the euro down below $1.27. The reference to EU finance ministers discussing "all possible ways" to stop the euro's rise gave traders pause for thought, as it raised the prospect that a further rise in the currency could be met by intervention by EU central banks on the currency markets.
For the moment, however, analysts still believe intervention is unlikely, unless the dollar drops sharply further. This feeling was reinforced by comments from the ECB governing council member, Mr Ernst Welteke. Yesterday he said euro strength enabled the European Central Bank to keep euro-zone interest rates low.
Meanwhile, the G7 statement will intensify speculation that China may let the yuan revalue by loosening its link with the US dollar. Speculation has been swirling that China would soon let the yuan trade in a wider range.
A spokesman for the People's Bank of China, which earlier had dismissed as groundless a local newspaper report forecasting a 5 per cent revaluation next month, said the central bank was indeed studying plans for exchange rate reform.
