Economic worries weigh on euro

The euro gave back early gains on Tuesday as worries over the health of the global economy weighed on the single currency.

A rare piece of positive economic news boosted the euro early in the session, helping to extend its rally against the dollar and the yen.

The single currency rose as the German Ifo business sentiment index rose to 83.0 in January from 82.6 in December, beating expectations for a drop to 81.0.

Analysts said the weaker euro, lower oil prices, the January interest rate cut from the European Central Bank and Germany’s second fiscal stimulus package might have contributed to the more upbeat sentiment.

Audrey Childe-Freeman, at Brown Brothers Harriman, doubted whether this could be sustained as Germany was only at the early stage of the downward phase of the economic cycle.

She said export demand had collapsed, industrial orders had fallen dramatically and industrial production was contracting, but the labour market was just starting to deteriorate.

Ms Freeman said a more pronounced increase in unemployment this year would contribute to marked deterioration in domestic demand.

“The better than expected Ifo index may add onto the more bullish euro sentiment of the past few sessions, but let’s not get carried away here,” she said. “Activity levels remain close to a 26-year low and the near to medium term eurozone economic outlook remains highly worrisome.”

The euro, after rising to a one-week high of $1.3328 early in Tuesday’s session, went into reverse to stand down 0.1 per cent at $1.3160 by midday in New York. The euro also gave up sharp early gains against the yen, falling 0.3 per cent to Y117.00.

Analysts said haven demand for both the dollar and the yen was boosted by figures that showed US consumer confidence fell to a record low in January.

The dollar, which had been on the back foot in the session as a rally in Asian equities boosted investor risk appetite, also pared early losses against the Swiss franc to stand up 0.2 per cent at SFr1.1401 and rose 0.4 per cent to C$1.2278 against the Canadian dollar.

The dollar eased 0.2 per cent to Y88.85 against the yen.

The pound continued to recover from its slide as UK financial stocks extended their gains after a sharp rally on Monday.

Traders said the pound was supported by large buying by “real money” investors, such as pension funds and asset managers, who were taking advantage of its weakness.

The pound rose 1.4 per cent to $1.4170 against the dollar, climbed 1.5 per cent to £0.9289 against the euro and gained 1.2 per cent to Y126.01 against the yen.