ECB intervenes to prop up euro

By Robin Oakley, CNN.com European Political Editor

LONDON, England -- The European Central Bank has intervened in currency markets to buy euros -- a move that immediately lifted the region's ailing currency.

The bank intervened when the euro reached 0.8625 dollars. Traders were taken by surprise because the Euro had already strengthened mildly from its record low of 0.8230 on October 26.

The euro immediately rallied on news of Friday's intervention, skyrocketing to almost 88 cents to the dollar before giving up most of those gains and falling back to hover above 87 cents. It had been languishing around 86.5 cents throughout much of the day.

On the previous occasion when the ECB intervened to help to prop up the euro on September 22 it was joined by other Group of Seven banks in a co-ordinated operation.

This time the ECB confirmed that it was not joined by the G7, although they had been informed of its plan to enter the market.

An ECB spokesman told Reuters: “This action is unilateral. The central banks of other countries were not invited to join.” But national central banks within the 11-country Euro-zone carried out the intervention along with the ECB.

Since the euro has been drawing favourable media comment in the past few days, with several predictions that it had bottomed out and could be on the turn, the ECB action looks like an effort to stimulate an upward trend.

However, some defence may have been required because of indications the previous day that the Euro-zone’s manufacturing sector was not expanding as fast as it had done earlier in the year.

The euro was launched in January 1999 at $1.17 but lost 30 percent of its value against the dollar in the first 22 months of its existence.

It had begun what appeared to be a mini-recovery, rising 4 percent over the previous few days before the ECB action. This was put down to evidence of a slowdown in the US economy.

The troubled currency, hit in September by Denmark opting not to join after a national referendum, had also been given a minor fillip when the United Nations agreed to a demand from Iraqi leader Saddam Hussein that Iraq should be paid for its oil in euros, rather than dollars.

This was part of his ongoing effort to undermine the dollar and US interests.

Euro-zone politicians like Hans Eichel, the German finance minister, have been trying to talk up the euro, saying that its rate against the dollar was no longer realistic on the grounds of the relative growth rates in Europe and America.

Economists have been forecasting an upward move in the euro because of those relative growth dynamics.

But Goldman Sachs economists recently scaled down expectations of growth both for the USA and the Euro-zone.

From CNNfn: ECB shores up euro, again

European Central Bank

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