The euro extended its bull run yesterday, jumping to record levels against the beleaguered dollar and the pound after European Union officials announced that inflation in the 15-nation currency zone reached its highest level in 16 years.
The euro extended its bull run yesterday, jumping to record levels against the beleaguered dollar and the pound after European Union officials announced that inflation in the 15-nation currency zone reached its highest level in 16 years.
The European currency surged as high as $1.5968 after the European Union's statistical agency Eurostat in Luxembourg said that annual euro inflation for March rose to 3.6% on higher prices for energy and food.
The March figure is up from 3.3% in February and exceeds an estimate of 3.5% published on March 31.
The fast pace of price increases stifles the chances of a near-term euro interest rate cut by the European Central Bank in Frankfurt, a prospect that sent the euro speeding ahead on the foreign exchange markets. By the close of dealing in London, the euro scaled a new sterling peak of 80.88p, up from 80.49p on Tuesday.
Juergen Stark, an ECB executive board member, said interest rates may not be high enough to contain inflation, while his Greek colleague Nicholas Garganas said price pressure "is more intense than previously foreseen".
Martin van Vliet, an economist at the ING financial group in Amsterdam, said he saw no signs that inflation- ary pressures would soon subside.
"Concerns about upside risks to the inflation outlook are unlikely to ease quickly, leaving little, if any, scope for the ECB to soften its interest rate stance," he said. "This may help push the euro-dollar to $1.60 in the short term."
Energy prices in the euro area have climbed rapidly in the last year - up 11.2% from March 2007 - and are the main factor behind higher inflation that squeezes shoppers on low incomes and risks making Europe less competitive than regions with smaller price increases.
Higher prices for dairy products, bread and fruit are also hurting household spending across the region - eating into one of the main drivers of economic growth in the euro area.
The ECB, which is concerned about eurozone inflation, has refused to follow the US Federal Reserve and the Bank of England in cutting borrowing costs to head off the possibility of recession in their economies. Rate cuts spur the economy but can make inflation worse.
Germany's Commerzbank said it does "not now envisage an ECB move (to cut rates) before the turn of the year".
Higher rates support the euro's value by increasing returns on investments in the currency.
The European Commission is expected to sharply reduce its forecast for euro-area growth again next month from a current prediction of 1.8% as the US economy slows and borrowers see tighter credit conditions.
The head of the euro finance ministers' group, Luxembourg Prime Minister Jean-Claude Juncker, said the currency's high level against the dollar had not yet hit the pain threshold for European exporters but many industrial groups, such as aircraft manufacturer Airbus, do not agree with that view.
The head of Airbus's parent company, EADS, has called the euro's current value "unbearable". Airbus relies on dollar sales but pays most workers and suppliers in euros.
Meanwhile, in Washington, the Labour Department said US consumer prices pushed higher last month as increases in energy, food and airline tickets offset the biggest drop in clothing prices in nearly a decade. The department reported that consumer prices rose 0.3% in March after being unchanged in February.
Core inflation, which excludes food and energy, rose 0.2% last month. Both the overall increase and the rise in core prices met analysts' forecasts.
