The euro was near its lowest-ever level
against both the dollar and sterling Friday and stock markets
slipped after weak data out of Germany and France renewed market
fears about a possible euro-zone recession.
Analysts said news of a contraction in Germany's gross
domestic product and a fall in French industrial production
raised concerns about the credibility of Europe's central bank
as well as the prospects for the 11-nation euro-zone's economy.
The fledgling currency, which just seven weeks ago was
heralded as a potential rival to the mighty dollar, was facing
doubts that the upstart unit would live up to its promise.
"It is difficult to find reasons to buy the euro at the
moment," said David Coleman, chief economist at CIBC Wood Gundy
"At the moment, the euro is really just a one way bet and
that is down. It is turning out to be a weak currency, hampered
by political interference with monetary policy."
The euro was now paying the price for the European Central
Bank's "wrong" decision Thursday not to cut interest rates,
Coleman said. He said the move, although designed to convince
the markets that the ECB had a firm grip on euro-zone inflation
and monetary policy, in fact had the opposite effect.
"The desire to have credibility only makes sense if you
have some in the first place," Coleman said adding that the
ECB's refusal to cut rates in the face of overwhelming evidence
of an economic slowdown in Europe smacked of politics rather
Coleman said the euro, which has fallen around 6 percent
against the dollar since its January 1 launch will remain under
pressure as investors flock to the U.S. unit ahead of this
weekend's Group of Seven meeting of finance ministers and
central bank governors.
The globe's top seven industrial nations are expected to
discuss supervision of financial institutions and speculative
hedge funds, among other things.
Coleman believes the U.S., tired of being the only guarantor
of world growth, may criticize the ECB and Europe for not doing
more to stimulate growth in the region.
"The U.S. is becoming a bit impatient and wants to see
other regions contribute their share (to world growth),"
"A weak economic background and questions about ECB
credibility are of course not at all helpful for the euro."
Stocks in Europe initially rose, buoyed by Wall Street's
100-point plus advance overnight but these gains quickly
evaporated after news that German gross domestic product had
contracted by 0.4 percent in the fourth quarter of last year
compared with the third quarter.
The data confirmed economists' estimates that Europe's
largest economy contracted at the end of last year as the Asian
and Russian financial crises began to dampen export growth.
News that French industrial production, excluding
construction, had dropped by 1.6 percent in December versus a
rise of 0.1 percent in November also hit market confidence.
"European stocks continue to defy the laws of economic
gravity," said David Brown, chief European economist at Bear
Stearns in London.
He said gathering evidence of a looming euro-zone recession
had been ignored for too long by stock markets and this could
result in a snap back in prices.
The dollar rose to a 12-week high against the struggling
Japanese yen in Tokyo Friday but was off its highs as profit
takers entered the market after the U.S. unit touched 120.75
yen, its best level since December 2.
Earlier comments by Japanese officials had seemed to endorse
yen weakness. Economic Planning Agency head Taichi Sakaiya said
the dollar around 120 yen was appropriate when looking at the
foreign exchange basis used in the government's economic
Sterling was hovering close to a record high against the
euro as the market took the view that the ECB is likely to cut
interest rates before the Bank of England.
"The pound's strength is driven by euro weakness and the
feeling that we're heading toward European rate cuts," a
currency trader at a major U.S. bank said.
In Tokyo Friday, stocks dipped for the third straight
session as concerns corporate Japan would unwind cross
shareholdings before the end of the fiscal year outweighed
incentives of a weaker yen and strong bonds, traders said.
The Nikkei 225 index closed 48.75 points lower at 14,098.04.