Kosovo effect sends euro plummeting to record low

THE EURO sank to another record low against the dollar yesterday as fears over the escalating action in Kosovo prompted a flight to safety in the financial markets.

The new European currency is set to weaken further in the coming days amid continued uncertainty in the former Yugoslavia, analysts said, with some predicting that the European currency could fall to as low as $1.05.

Yesterday, the euro slipped to $1.068, its lowest rate yet and almost 10 per cent below its post-launch highs. Against sterling, which like the dollar is seen as a safe haven in times of political uncertainty, the euro set a new low of 66.05p.

"Kosovo is the straw that is breaking the camel's back," said Paul Meggyesi, currency analyst at Deutsche Bank.

Ken Wattret, economist at Paribas, said: "The Kosovo situation had a pronounced effect on the euro at the end of last week. The markets are looking for a safe haven, and at the moment that's the US dollar. The euro zone is perhaps a bit to close to Kosovo for geographical comfort."

The crisis in Kosovo is the latest development to hit the euro, which, contrary to market expectations, has weakened substantially since its launch. Public bickering between the European Central Bank (ECB) and the former German finance minister, Oskar Lafontaine, helped undermine the currency, as did the resignation two weeks ago of the entire European Commission.

Growing concerns over the prospects for European growth have also prompted investors to switch away from the new currency and into the surging US dollar. Research carried out by analysts at Deutsche Bank - which calculated "theoretical" past values of the euro using historic movements in the currencies of the 11 participating countries - suggests the euro is now close to decade lows.

Mr Meggyesi said: "Investors are currently of the view that, from a financial perspective, Europe is not a safe place to be in."

Recent comments by ECB officials, together with new evidence of slowing activity on the Continent, have fuelled speculation of a cut in European interest rates at the ECB's next meeting on 8 April.

Over the weekend Otmar Issing, ECB chief economist, warned that growth in the euro zone was weakening significantly. Meanwhile, a survey of business confidence released in France revealed a sharper-than-expected drop in optimism. The latest INSEE industrial survey suggested that French manufacturing activity contracted this month.

Marian Bell at Royal Bank of Scotland said: "There does seem to be pressure building for the ECB to cut [rates] and it may get to the point where that's hard to resist."

In the UK, expectations of interest-rate cuts are also building, and yesterday's weak consumer credit data fuelled hopes that the Monetary Policy Committee will reduce the cost of borrowing again at its meeting next week.

Net UK consumer credit rose by a lower-than-expected pounds 935m last month, a figure that tied in with February's disappointing retail sales, analysts said. There was also a small downward revision to the annual growth rate of M4, the broad measure of money supply.

Separate figures published by the Bank of England revealed that the number of new mortgage approvals rose to 87,000, the highest since June last year. Analysts said the data suggested that the housing market was continuing to improve.