Currency traders predict the euro will fall below the psychologically important figure of 90 US cents next week after the currency reached another record low yesterday and European politicians squabbled over the cause of its continued weakness.
The euro dipped to $0.9031 yesterday morning, reaching its third record low within a week, before staging a small recovery and climbing close to 91 US cents shortly after the New York markets opened later in the day.
The markets remained unimpressed by Thursday's decision by the European Central Bank (ECB) to raise interest rates by 0.25 per cent and traders in Frankfurt said that it was now only a matter of time before the euro fell below 90 US cents.
"The turning point for the euro will probably not come until we see signs that the situation in the USA is worsening. And that's not likely to happen too soon," said one.
A statement by Bundesbank President, Mr Ernst Welteke that he could "hardly imagine" the currency falling below 90 US cents did little to help the beleaguered euro or to halt the apparently unstoppable rise of the dollar.
The President of the EU Commission, Mr Romano Prodi attempted to calm popular anxiety about the currency's decline by declaring that the euro's weakness was a temporary phenomenon.
But Prof Jurgen Donges, the head of a panel of economic advisers to the German government, argued that Europe's politicians could halt the euro's decline by introducing economic reforms.
"Europe must Americanise in a positive sense. We must get on to a path of enduring growth through clever policies. Then the markets will react too," he said.
Mr Erwin Huber, a German opposition spokesman on finance, blamed Chancellor Gerhard Schroder for the euro's decline, claiming that Germany's economic recovery offered an opportunity to initiate structural reforms in Europe's biggest economy.
"If we had a head of government who stood for courageous reforms and not for a jumble of things, the euro zone would be regarded differently internationally," he said.
Strong US growth data this week reinforced expectations that the Federal Reserve will raise US interest rates when it meets on May 16th, giving the dollar a further boost. The ECB has never intervened in the markets to support the euro, although it has acted as an intermediary on behalf of the Bank of Japan to weaken the yen against the euro.
Europe's central bankers are sceptical about the usefulness of intervening unilaterally and the US is unlikely to agree to any concerted action to lower the value of the dollar.
With interest rate rises failing to impress the markets, the ECB is left with few options beyond waiting for the markets to turn and urging Europe's politicians to step up their structural reforms.
The central bankers are especially impatient with Germany's slow pace of reform, despite the fact that Mr Schroder's centreleft government is pushing through an ambitious overhaul of the tax system.
Prof Ruediger Dornbusch, of the Massachusetts Institute for Technology, is among the economists who blame Germany's insistence on tempering the rigours of the market for the euro's decline.
"As long as they continue to talk about workers' rights over there, the euro has no chance to recover," he said yesterday.
