BBC Thursday, 5 July, 2001, 18:20 GMT 19:20 UK

Euro plunges on rate decision

The euro has fallen over a cent against the dollar, hitting its lowest point so far this year.

The slide was prompted by the European Central Bank's decision to leave eurozone interest rates unchanged for a second month.

The euro fell to $0.8357 from a session high of $0.8479.

Launched at $1.17 in January 1999, the euro hit a historic low of $0.8230 last October.

It is the first time that the euro has dipped below $0.84 since November last year.

Inflation fears

The decision not to raise interest rates caused investors to be nervous about the outlook for the eurozone economy and then sell off the euro.

Although the US is also suffering from an economic slowdown, investors have turned to the dollar as a safehaven during the global difficulties.

Mr Duisenberg has repeatedly signalled his reluctance to tinker with eurozone interest rates in the hope of stimulating growth.

The bank is trying to balance the pressures of a slowing economy against the threat of soaring inflation.

In an address to the European Parliament on Tuesday, Mr Duisenberg said the bank had no reason to change its view that its current benchmark interest rate was appropriate.

At a press conference on Thursday the bank's head admitted that he was baffled by the weakness of the euro.

"I cannot explain fully the level of the euro...all the factors explaining the depreciation of the euro seem to have reversed, but this hasn't had an impact on the euro exchange rate yet," said Mr Duisenberg.

"But I remain convinced that the euro has indeed a strong potential to appreciate," he added.

Standing firm

The ECB's main refinancing rate remains at 4.5%.

The bank had faced heavy pressure to cut rates, in the light of the softer economic outlook across Europe.

But in the weeks leading up to the meeting, European monetary officials repeatedly stressed their opposition to a cut purely aimed at stimulating economic growth.

Less than an hour before the ECB unveiled its decision, the Bank of England said it would also not be lowering rates in the UK.

Under pressure

Pressure for a cut has been mounting since the US Federal Reserve lowered interest rates last week - its sixth successive cut this year.

The eurozone has been hit by waves of gloomy economic data - in particular, growing indications of a serious slowdown in Germany, Europe's biggest economy.

German unemployment figures for June released on Thursday showed a seasonally-adjusted rise of 22,000, the sixth consecutive monthly increase.

Consumer and business confidence throughout Europe has also fallen sharply, according to a number of country surveys.

And the European Commission said on Tuesday that its economic sentiment index for the euro area fell to 101.1 in June from 101.8 in May, its sixth consecutive monthly slide.

-- Anonymous, July 05, 2001