The euro jumped to its highest level ever against the dollar yesterday as news that US productivity grew at its fastest rate for 20 years in the third quarter failed to stop the US currency falling.
The 9.4 per cent increase in productivity underlined the critical role of the US in driving the global economic recovery but also showed the market's pessimistic view of the dollar. One trader said: "It takes good news to hold the dollar steady, and bad news will just send it lower."
The euro climbed to $1.2128 against the dollar, its fourth successive day at a record high before falling back slightly. Economists warned that the euro's rise threatened to damage the competitiveness of European companies and could stifle the nascent export-led recovery in the euro zone.
The European Central Bank, which meets today, is expected to keep interest rates on hold at 2 per cent. However, the bank could come under pressure to cut rates if the euro continues to appreciate rapidly.
Figures released yesterday confirmed that the euro-zone's return to growth in the third quarter was almost entirely due to a strong export performance, with household consumption flat and investment falling.
The contrast between the US and euro-zone economies is stark. US productivity growth was revised up to an annualised 9.4 per cent in the third quarter from an initial estimate of 8.1 per cent. US workers now produce almost 20 per cent more per hour than in 1998.
Mr Niall Duggan of Bank of Scotland pointed out that investors continued to sell the dollar against a range of currencies, despite the recent statistics from the US. He said continued dollar weakness would put inflationary pressures on the recovering economies in the euro zone, and could force the ECB to act to regain control of price stability.
"The ECB might decide to row in and cut rates so it can regain control of price stability in the euro zone, which is its stated aim," he said. "If the dollar remains weak, it will put inflation in the euro zone under the cosh."
Mr Niall Dunne of Ulster Bank suggested that the dollar could weaken further if US payroll statistics due tomorrow showed recent growth was not translating into new jobs.
Mr Dunne said the market was looking for a headline figure of between 160,000 and 180,000 new jobs created last month. However, he said that this could be hit by the fact that 60,000 workers were on strike in California, and a recent survey showed there were 90,000 lay offs in November. - (Financial Times Service)
