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Currencies

By Anne D. Picker, International Economist, Econoday     Monday, June 11, 2001

Currencies
The euro continued to trade within a relatively narrow range around the ECB's Thursday meeting. Although virtually no one expected interest rates to be lowered, traders didn't want to be surprised again as they were on May 10 when the ECB lowered their policy making interest rate to 4.5 percent. Continuing bleak economic news certainly didn't help the currency but neither did it hurt it as much as before.

The pound sterling was subject to conjectures about the future of the euro in Britain after the Labour Party's landslide reelection to a second full term. British treasury sources dismissed the market's reaction to Labour's victory when the pound hit a 15-year low against the dollar of $1.3775 Thursday. They insisted the government's euro plans had not changed, and the assessment of Chancellor of the Exchequer's five economic tests for membership would proceed, as intended, over the next two years. Despite the reassurances, experts believe the pound would come under continued pressure because it would need to be devalued by between 10 percent and 20 percent to achieve fair value ahead of euro entry. The flurry of euro speculation came in spite of the fact that many City economists do not believe the Treasury would be able to conclude that the five tests - on convergence, flexibility, investment, financial services and jobs - have been met.

The yen snapped two weeks of gains against the dollar and euro on expectations that the first quarter gross domestic product report due on Monday will show slowing. Most people are still looking for the yen to continue to weaken. Besides Monday's report, concern is emerging about the lack of detail from Prime Minister Junichiro Koizumi on plans to write off bad bank loans and revive growth.

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