The euro has faced further selling pressure following the surprise resignation of the entire European Commission. While it did recover some ground against the US dollar in afternoon trading, many analysts feel that the ongoing political crisis will keep the currency under pressure in the weeks ahead.
The euro faced heavy selling pressure early yesterday, falling to $1.0816 at one stage. It recovered some poise in later trading and at the close of European trading it was quoted at $1.0910 from $1.0923 a day earlier and at 67.20p against sterling from 67.35p. As a result the pound fell back slightly to 85.35p from 85.51p on Monday.
The euro had rallied towards the end of last week, reaching $1.1060 following the German finance minister Mr Oskar Lafontaine's resignation - it had been trading at $1.0860 just before the announcement. However, analysts yesterday said that no short term recovery was in prospect.
According to Mr Jim Power, chief economist at Bank of Ireland, the resignation of the Commission points to a major policy malaise at the centre of Europe. "It is simply another reason to be negative about the currency," he said.
Foreign investors simply do not want to invest in a currency where there is this sort of a political and bureaucratic mess. It also takes some of the positive gloss off Mr Lafontaine's resignation last week, he added, which had been seen as positive for the currency as it would lessen the policy conflict between th EU politicians and the Central Bank.
According to Mr Power, the euro will now trade between $1.0750 and $1.1080 over the coming weeks, although an interest rate cut from the European Central Bank would underpin the currency.
"A rate cut would show the ECB is now prepared to do something to address Europe's economic malaise," he added.
However, views on the importance of the Commission's resignation are mixed. AIB's economist, Mr Oliver Mangan, said the resignation makes very little difference. "It does not impact on any real economy or on monetary policy," he noted.
Mr Mangan pointed out that the real power in Europe resides in the Council of Ministers, while the ECB is important to financial markets. "The only impact the resignation may have is that, coming on top of Mr Lafontaine's departure last week, the ECB may be reluctant to cut rates," he said.
He pointed out that the impeachment of President Clinton did not deter investors from either the Dow or the dollar and, unless it will impact on European economies or monetary policy, it is "neither here nor there".
Even if the negotiations in Brussels on budgets are delayed it will make little difference to national budgets, according to Mr Mangan.
"CAP reforms are already fairly bedded down and, while the discussion on structural aids may be delayed, it is hard to see it having an impact on any country maintaining the 3 per cent deficit rule under the Stability and Growth Pact."
He is also expecting the euro to now settle down to levels between $1.08 and $1.10, before picking up in the second half of the year as the data on the German economy becomes more positive. Already, the German economy is looking a little better, with production up and unemployment down, and business confidence is now expected to improve.
As a result, he is predicting that the euro may be back up around $1.12 to $1.15 by the second half of the year. A level of about $1.15 would be needed for the pound to reach 90p against sterling. He added that a further euro zone interest rate cut cannot be assumed.
