The beleaguered euro dropped again yesterday, defying positive economic signals from Europe, as many traders who had bought the single currency expecting it to rise appeared to give up hope.
The euro sank to a closing London low of $0.98 against the dollar, and slipped further in New York to $0.9735, the equivalent of two deutschmarks.
The currency's fresh slide a day after it fell below parity level with the dollar came despite what would normally be positive news for the currency.
Signs of inflationary pressures from the US employment cost index kindled fears of aggressive interest rate rises by the Federal Reserve. The Fed's Open Market Committee, which meets on Tuesday and Wednesday, could raise the target for the federal funds rate by 0.25 basis points.
The fear of higher interest rates may yet unsettle US equity markets. Yesterday at the World Economic Forum in Davos, Switzerland, the British Prime Minister, Mr Tony Blair, warned that the world economy could face a hard landing in the event of a sell-off in the stock market.
Yesterday's figures showed the US employment cost index rose a stronger-than-expected 1.1 per cent in the fourth quarter, and GDP was put at an annualised 5.8 per cent. While the figures underlined the growth differential which has favoured the US dollar, they also provoked selling in the Dow Jones Industrial Average due to the likelihood of higher rates. The Dow closed down nearly 300 points, or 2.6 per cent, yesterday while the Nasdaq suffered a loss of 3.74 per cent, or 151 points. Falls in US asset markets have usually favoured the euro. "This slide has left fundamentals behind and the euro is now being driven by market momentum," said Mr Michael Rosenberg, global head of research at Deutsche Bank in New York.
Mr Cameron Crise, currency strategist at Warburg Dillon Read in London, said the fall threatened havoc in the markets. Despite the slide, the European Central Bank failed to comment. In Davos, ECB officials maintained their public face of indifference to the euro's plight. Christian Noyer, the ECB's vice-president, questioned repeatedly on the issue, refused to comment.
Meanwhile, at the forum Mr Blair was troubled that some economists thought the new economy in the US could be increasing the likelihood of instability, by fuelling a boom in stock market prices that could turn into a bust.
He cautioned that previous periods of strong technological advance, such as the growth of the railway system in the mid 19th century and the expansion in radio in the 1920s, had been associated with excessive gains in stock market prices.
"The re-entry phase after these periods of excess has been very painful," he cautioned. "We must remain mindful of these lessons."
Mr Blair indicated that the EU's March summit in Lisbon offered an opportunity to advance economic reform in Europe which, if grasped, could make a big difference to attitudes towards Europe in Britain.
He asked: "Does Europe continue with the old social model, that has an attitude to social legislation and welfare rooted in the 1960s and 1970s, or does it recognise that the new economy demands a redirection of European economic policy for the future?"
In New York, US stocks ended with steep losses yesterday. Investors fleeing the stock market sought safety in bonds, pushing the interest rate down to 6.44 per cent.
