Expected French ′Non′ Hits Euro | Business| Economy and finance news from a German perspective | DW | 26.05.2005
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Expected French 'Non' Hits Euro

The euro remained near seven-month lows Thursday due to continuing concerns that France will vote against the EU constitution, an impression reinforced by reported comments from former finance minister Nicolas Sarkozy.


Under pressure

The euro slumped to 1.2505 dollars, its lowest level since October 20, but rose to 1.2510 in late European trading from a high point of 1.2619 dollars on Wednesday. The dollar stood at 108.00 yen, from 107.70 on Tuesday.

Though the comments ascribed to him have been denied, The Times newspaper's suggestion that Sarkozy told French ministers that the vote was lost pushed the euro down to its lowest level since October.

"Given the close proximity of the vote, the increasing concerns of the fallout in Europe in the event of a "no" and the lack of other market moving developments, French referendum speculation is exerting greater influence on euro movements," said Mark Austin, global head of currency strategy at HSBC.

The "yes" campaign was due later Thursday to seek to regain the initiative, with French President Jacques Chirac using a television appearance to convince voters to support the constitution.

But most analysts think it will be too little too late.

"Limited fallout"

Despite the near-term impact of the expected "no" vote, HSBC's Austin said the market reaction had been "overstated." He added that the market should be "fairly well-braced" for a "no" vote, suggesting a "limited fallout" when trading resumes on Monday.

The euro has been under pressure in recent weeks by fears the French will vote against the EU constitution this weekend as well as concerns about the state of the euro-zone economy.

Investors have placed greater importance on developments related to interest rate differentials than structural concerns relating to the United States' twin deficits. Economic concerns surrounding the euro zone mounted on Wednesday after another disappointing economic survey from Germany, the zone's largest economy.

German business confidence slumped to the lowest level in 21 months in May, quashing hopes for a pick-up in economic activity in the country in the foreseeable future. Despite the grim economic picture in the 12-nation currency zone, analysts did not expect an imminent interest rate cut from the European Central Bank. The ECB has held its key interest rates steady at 2.0 pct since June 2003.

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