Third intervention to boost euro

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Monday, 6 November, 2000, 15:58 GMT Third intervention to boost euro

The European Central Bank (ECB) has intervened on the currency markets for a third time to boost the single currency, and once again it caught traders and speculators by surprise. The intervention immediately forced up the price of the euro by about one cent, to $0.8720 - up from $0.8626 before the bank's action.

However, once again the bank acted on its own, and currency markets soon began to call the bluff and pushed the single currency lower. Within one hour, the euro dropped below $0.87 and by the afternoon it slid below the point of intervention, trading at just over $0.86.

The ECB last intervened on Friday lunchtime, but the initial surge of the euro was soon wiped out during the day's trading. In late September, the gains had been more sustained, as the ECB had been joined by all the world's leading central banks at its first intervention to prop up the euro.

'A skirmish in a long war'

The bank has refused to give details of the nature and size of its intervention, but analysts say it is unlikely to have committed a lot of money.

And they point out that no central bank has enough currency reserves to make much of an impact in the multi-trillion dollar money flows of the world's financial markets.

However, they said the intervention was likely to be the start of a long, drawn-out campaign to influence the mood of the markets.

"This is just a skirmish in what is likely to be a long war," said UBS Warburg economist Holger Fahrinkrug.

The ECB intervention is now being seen as a clear signal that the bank will not sit back and see the euro slide any further.

Inflation pressures

On Friday, the ECB said it was worried "about the global and domestic repercussions of the exchange rate of the euro, including its impact on price stability".

The US Treasury Secretary Lawrence Summers backed the ECB's second intervention, while re-affirming his commitment to a strong dollar.

The Washington government is unlikely to join any ECB action now, with just one day to go before the US presidential election.

When the ECB intervened for a second time on Friday, it came on the back of a steady rise of the euro during the week.

However, the euro's rally appeared to have run out of steam on Thursday, when the ECB decided to leave its key interest rate unchanged.

Since the euro's launch in January 1999, it has lost about 30% of its value against the US dollar.

'Give the ECB some time'

The President of the European Commission, Romano Prodi, meanwhile asked financial markets to give the ECB some time to settle into its job.

Speaking at the annual conference of the Confederation of British Industry in Birmingham, Mr Prodi said the US Federal Reserve system had needed 20 years until it managed to do its job effectively.

He said the ECB would not need 20 years, but should be given at least two years to deliver its job.

http://news.bbc.co.uk/hi/english/business/newsid_1009000/1009225.stm

-- Martin Thompson (mthom1927@aol.com), November 06, 2000


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