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This Chronology of the crisis is based on information from several news sources
(ECB bullettin, Reuters, Wall Street Journal, New York Times, Int. Herald Tribune, CNNfn, Financial Times, Bloomberg,etc.)

Go to most recent update

Go to the chronology for the year 2000

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The minimum reserve holdings are within the range of 1.5-2.5% of relevant liability basis (after deducting a lump sum); interbank liabilities and liabilities vis-a-vis the Eurosystem will NOT be subject to the reserve requirement. Reserve holdings will be remunerated at the average (over the maintainance period) of the interest rate charged in the Eurosystem's refinancing operations.

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More than half of all Danes would vote in favour of joining the single currency if a referendum were held on the issue today, according to a poll by the Greens Institute published in the financial daily Boersen on Monday.

Britain will shortly publish a blueprint for joining the euro but a decision to enter the single currency remains unlikely before elections due to take place by 2002, Chancellor of the Exchequer Gordon Brown said Monday.

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The euro zone had a trade surplus of  7.2 billion euros (8.7 billion dollars) in October and the 15 EU countries had a surplus of 1.6 billion euros, the EU statistics office Eurostat reported on Thursday. In the first 10 months of 1998, the 11 euro-zone countries had a  trade surplus of 71.1 billion euros, or 600 million euros less than the figure for the same period of 1997. The 15 EU countries had a surplus of 16.1 billion euros from  38.7 billion euros.

The exchange rate of the dollar against  the euro is not a problem, EU Monetary Affairs Commissioner Yves-Thibault de Silguy  said on Tuesday. 

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The Governing Council of the ECB decides that for the main refinancing operations to be settled on 24 February and 3 March 1999, the same conditions will apply as for the previous such operations settled earlier in the year.

The euro zone registered a trade surplus of 6.5 billion euros in November 1998, down by 1.8 billion from a year earlier, provisional figures published on Thursday showed. For the 15-nation European Union as a whole, the trade surplus  was 1.5 billion euros, compared with 4.1 billion euros in November 1997.

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Hans Tietmeyer, president of the Bundesbank, has hinted that the European Central Bank would be worried if the euro fell further against the dollar, as the ECB came under further pressure to boost European growth. Speaking after a meeting of Group of Seven finance ministers and central bankers on Saturday, he said: "The euro is certainly not overvalued. What matters is that the euro earns a position of confidence in the long run." Mr Tietmeyer's comments came after Oskar Lafontaine, German finance minister, said the euro was neither strong nor weak at present. The euro closed at $1.1096 last week, 5 per cent weaker than at its launch in January.

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The shaky euro could continue its fall and create a crisis unless European leaders reduce farm subsidies and regional aid spending, German officials warn.

British Prime Minister Tony Blair reiterated his government's stance that Britain will not rejoin the Exchange Rate Mechanism, from which is was ejected in 1992, or shadow the European single currency prior to possibly joining the euro after the next general election. 

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Comments around the world stress the euro's 6.7% depreciation against the US dollar since the beginning of the year as a signal that the first credibility test by the ECB has not gone well. For instance, the International Herald Tribune state that the euro has shown two features that may last as strong first impressions (a) the currency is not immune for political interference and (b) it has not found a strong, commanding and representative voice.

Other sources disagree. Perhaps too much ado is being made for a development that could be seen more as a reaction to positive growth surprises in the US (increasing the likelihood of an interest rate increase).

Does the decline of the euro imply that the ECB will refrain from cutting interest rates, in the fear that the public will interpret the euro's decline as a sign that the new institution's credibility is at risk?

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As regards public deficits, the European Union said that the 11 countries sharing Europe's single currency had a combined budget deficit of 2.1percent of gross domestic product in 1998, down from 2.5 percent of GDP in 1997.  The 15-nation EU had a budget deficit of 1.5 percent, down  from 2.3 percent in 1997, said Eurostat, the EU statistics agency.

As regard debt  Eurostat said the euro zone's public debt declined to  73.8 percent of GDP from 74.6 percent. Aggregate EU debt shrank to 69.5 percent of GDP from 71.7 percent.

According to Tietmeyer, two things make it more difficult to cut interest rates in the euro area:
First, political remark.  Bundesbank President Hans Tietmeyer warned that continued policy demands actually make it more difficult for the
central bank to adjust interest rates. ``The more intensely these discussions are led in public, the less scope it leaves for monetary decisions,'' Tietmeyer was quoted by Handelsblatt as saying.
Second, weak euro: Tietmeyer said monetary policymakers don't want the euro to remain weak against the dollar. The euro has hovered around $1.08 for the last week, down some 7 percent from its Jan. 1 launch. A weak euro, he said, risks sinking confidence within the 11 countries that adopted the euro and outside of the euro bloc.

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Surprise resignation of German Finance Minister Oskar Lafontaine. FT: Lafontaine quits in power struggle
Commentators say: the euro's 10-week slump against the dollar may be over, judging by the currency market's reaction to the news. The departure of Lafontaine, a vocal critic of the European Central Bank's refusal to cut interest rates since it took control of monetary policy for the euro 11, is the first good news for the euro since its 7.3 percent slide began in January.
``Now that he's off the scene, the road is clear for the ECB  to reestablish credibility,'' said Stewart Newnham, a currency strategist at Commerzbank AG. ``The euro's risk premium has disappeared.''

The euro surged as much as 2.4 percent to $1.1061 after the announcement, from as low as $1.0798 in earlier trading. It also erased losses against the yen and pound.

European Central Bank policy-makers have resisted Lafontaine's regular demands to reduce its benchmark 3 percent lending rate, even as economic reports suggested lower ECB rates  may be desirable to boost growth. With Lafontaine's departure, the ECB may have greater freedom to spur growth without compromising its independence or damaging its credibility.

Different comments:
The move ``just points out that there are political problems in Germany, and that should add to the concern about the euro,'' said Eric Nickerson, the global head of currency strategy at BankAmerica Corp. in New York, who said he expects the euro to fall to $1.05 by mid-year.

Bundesbank council member Klaus-Dieter Kuehbacher was quick  to say Lafontaine's departure won't affect ECB policy. ``The ECB has to do its job independently,'' said Kuehbacher, a member of the Bundesbank council that advises Bundesbank President and European Central Bank board member Hans Tietmeyer.

Is the ECB more likely to cut rates? After Lafontaine announced his exit, the implied yield on the three-month March Euribor futures contract fell 4 basis points to 3.04 percent. The yield on the June contract fell 7 basis points to 2.88 percent, far enough below current three-month money market rates of 3.07 percent to suggest growing optimism for a rate cut by the middle of the year.

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LAFONTAINE: Opportunity to start afresh (FT 13)
After Oskar Lafontaine: EICHEL: Bland, but a relief (FT 13)
Mr Schroder takes over the party chairmanship. Hans Eicher (prime minister of Hesse, central Germany) replaces Lafontaine.

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FT: Lafontaine blames lack of teamwork

French Finance Minister Dominique Strauss-Kahn said the surprise resignation last week of his German counterpart Oskar Lafontaine won't reverse the growth-oriented emphasis of the 11 single-currency states. ``Europe's policy of jobs and growth is not altered by the fact that Oskar preferred to renounce his duties,'' Strauss-Kahn said, referring to the outgoing minister as a friend. ``Europe must pursue the strongest possible growth.''

European Central Bank  President Wim Duisenberg proposed declaring Dec. 31 a bank holiday in the 15-nation European Union to prevent the millennium changeover from disrupting the financial system.

EU: Late at night the European Commission's 20-member executive  resign after a report criticized several commissioners (including Jacques Santer, the president) over allegations of fraud, nepotism and mismanagement. EU: FT Executive resigns en masse

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Early in the morning, stock and bond prices do not move in response to the resignation of the E.Commission. But the euro (which has declined as much as 7.5 percent since its Jan. 1 inception) falls to $1.0865 from $1.0924 on concern the commission's collapse begged longer-term questions about European unity and the effectiveness of its institutions. The currency's decline makes it likely the European Central Bank will reject demands that it cut its 3 percent benchmark rate at  its policy council meeting on Thursday March 18, analysts said.

During the day, the euro regained most of its overnight losses as dealers in the bond, equity and currency markets reacted calmly to the overnight resignations of all 20 European Commissioners. The euro, which had fallen to little more than $1.08 overnight, finished in Europe a cent above that level.

Comments

The resignation of the European Union's executive will undermine the region's ability to resolve trade disputes with the U.S. and overhaul its own finances, as well as dealing a blow to the euro. EU Trade Commissioner Leon Brittan described the removal of the executive as a ``disaster'' just as U.S.-EU relations are hitting a new low. Negotiators had been locked in talks ranging  from the use of Concorde in the U.S. to the import of Chiquita Brands International Inc. bananas into the EU, under the cloud of threatened U.S. sanctions.

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As the European Central Bank (ECB) meets to discuss interest rates on Thursday it has warned countries within the eurozone that economic downturn could undermine their capability to keep their deficits in check. Despite its gloomy outlook for the eurozone economy, few predict the ECB will act this month to cut base rates from their current level of 3%. But it says that prolonged economic slowdown could push euro zone fiscal deficits higher, toward 3%, as current budget plans were assuming optimistic growth scenarios. 

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Sharp rises in selected stocks riding on Europe's mergers and acquisitions bandwagon failed to prevent wider markets from falling slightly. Even the Italian bourse could not gain ground in spite of hectic trading in the banking sector, subject of the current round of bid fever.

Profit-taking and a general wait-and-see attitude towards further European corporate restructuring were behind the drift, analysts said. The underlying tone of the markets remained generally positive, however, including on the earnings front, where the news so far this year has not been as bleak as forecast.

The euro remained weak against the dollar and investors, warming again to the oil sector, were watching today's Opec meeting in Vienna for clues to longer-term oil prices and what they might mean for equity markets and sector strategy.

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At night Nato ordered air attacks against Yugoslavia, after the failure of diplomatic efforts to persuade Milosevic, the Yugoslav president, to accept a peace deal for Serbian province of Kosovo. No attack is however carried out during the night.

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The dollar fell against the yen on concern U.S. stocks will decline for a fourth day, eroding investor demand for the U.S. currency. ``The stock market's not performing well,'' said David Coleman, the chief economist at CIBC Wood Gundy. ``At this stage, there's no real reason to favor the dollar.'' The dollar fell for a second day, dropping to 117.65 yen,down from 118.04 yen late yesterday in European trading. The dollar was little changed against Europe's single currency, leaving the euro at $1.0929 from $1.0924, supported by speculation that North Atlantic Treaty Organization forces may soon bomb Yugoslavia to keep civil conflict there from worsening.

Former Italian Prime  Minister Romano Prodi said European Union officials must adopt policies to prevent deflation, suggesting he expects prices to begin falling in the 15-country area. Prodi, who is also a front-runner for the presidency of the EU's executive body, the European Commission, said in a speech delivered at a conference on fiscal policy in Frankfurt, ``Europe  has to commit to as coordinated policy to get away from the moving sands of deflation by resuming a path of growth.''

At the European Union summit in Berlin: consensus on the name of former Italian Prime Minister Romano Prodi as the new president of the European Commission.

Euro money-market rates fell as a rise in German import prices was offset by figures showing retail price inflation remains benign in Europe's  largest economy, keeping alive hopes for interest rate cuts. Interest-rate futures contracts that settle in April currently anticipate three-month rates of percent 2.93, a loss of 3 basis points today. The 8 basis point gap between that rate  and current lending rates of 3.01 percent indicates investors and traders still harbor reservations about the chances for a cut in April. Contracts that settle in June currently anticipate three-month rates of 2.86 percent.

The fall in rates ``has a lot to do with the German  inflation rate,'' said Pernille Sindby, a European economist at  Den Danske Bank. Still, she said, ``If a cut comes, it will come in late May or June'' from the European Central Bank.

In its first report on the euro-zone since the launch of the single currency, the Organisation for Economic Co-operation and Development hinted broadly that the European Central Bank should loosen its monetary policy. The report focused on the worsening economic outlook for Europe since the euro was launched and the implications this would have for the policies of national governments. The OECD predicted there would still be slack in the euro-zone economy next year, which implied little need to tighten monetary policy because of incipient inflationary pressures. But financial problems in emerging market economies and weaker growth in the US and the UK could deal a further blow to business confidence and stall the euro-zone's economic recovery.

"Given also that inflation is currently falling, reflecting factors such as lower world commodity prices and import prices due to the exchange rate appreciation, these factors may provide some further scope to ease the monetary policy interest rate below the current level of 3 per cent," the report said.

On fiscal policy, the OECD said many governments in the euro-zone would have to make "considerably more progress" pruning budget deficits to respect the limits in the stability and growth pact. Many countries need to run deficits of less than 1 per cent of national income (adjusted for the ups and downs of the economic cycle) if they are to be 95 per cent confident of keeping their deficits within the 3 per cent of national income limit laid down in the stability and growth pact, the report said. To meet the same criteria, Denmark, the UK and Sweden would need to run modest, cyclically adjusted surpluses. The OECD warned that tax competition was already eroding some government revenues, while there was also a need to reduce the burden placed on non-wage labour costs by social security contributions.

Otmar Issing, the ECB's chief economist, also said: "Euro-area growth has slowed down considerably. The risks are on the downside". Mr Issing hinted that the slowdown had caused the ECB to start thinking of cutting its benchmark refinancing interest rate. Alluding to recent ECB statements that interest rates would remain unchanged for the foreseeable future, he said: "The foreseeable future ends when we cut rates."

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Inflation in the 11-country euro zone was steady at 0.8 percent on a 12-month comparison in February, the EU's statistics office Eurostat reported on Thursday.  In all 15 countries of the European Union (EU), prices had risen by 1.0 percent on a 12-month basis in February from 0.9 percent on a 12-month comparison in January.   In February 1998, the 12-month inflation figure in the euro zone was 1.1 percent and in the EU it was 1.3 percent.   In February this year the highest inflation rate was 3.5 percent in Greece, followed by 2.7 percent in Portugal and 2.3 percent in Ireland. The lowest figures were 0.1 percent in Germany, 0.2 percent in Sweden and 0.3 percent in Austria and France.

European Central Bank president Wim  Duisenberg said on Thursday that doubts about political support for stability-orientated monetary and fiscal policy might have weakened the euro in January and February.   "The possibility cannot be excluded that increased uncertainty  about the political support for a stability-oriented monetary and fiscal policy contributed to the weakening of the euro," Duisenberg said in a speech prepared for delivery at a symposium on the euro in the French capital.  But he repeated his view that the fall of the euro was mainly  ttributable to a set of surprisingly strong US economic indicators since the start of the year and said the current euro exchange rate did not suggest a structural weakness of the currency.  Duisenberg added, however, that governments' efforts at  achieving fiscal consolidation in the 11 euro zone countries had been "rather disappointing".

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European Union leaders agreed a compromise package of budgetary, farm and regional policy reforms to give the EU the financial stability over the next seven years to expand its membership into eastern Europe. The agreement achieved its broad objective of budgetary rigour although radical reforms to the common agricultural policy of farm subsidies agreed by farm ministers this month were significantly diluted.
Gerhard Schröder, the German chancellor who chaired the meeting, acknowledged that the compromise was "not ideal". But he stressed that the successful conclusion of the Agenda 2000 negotiations on reform of the Union's finances was the first time the EU had simultaneously reached an accord on future policies for its budget, the CAP and the structural funds that help poorer regions. Mr Schröder, whose country holds the EU's rotating presidency, also said the deal should cut Germany's large E11bn ($12bn) net contribution to the EU budget.
The negotiations were marked by protracted confrontation between Mr Schröder and Jacques Chirac, president of France, who persuaded the meeting to drop plans for far-reaching cuts in support for cereals and beef and delay reform of the milk market.
Mr Chirac said he was "very happy to have been able to redesign" the farm package. The agreement promised to limit farm spending to a real annual average of E40.5bn from 2000 to 2006. In allocating E213bn to funds for regional aid over seven years, it slightly exceeded the target of the German presidency.
The structural fund negotiations saw some difficult exchanges between Mr Schröder and José María Aznar, the Spanish prime minister, over Spain's demands for a continued high level of so-called cohesion fund monies, originally granted to Spain, Portugal, Greece and Ireland to help them prepare for the euro.
The summit launched a modest reform of EU revenues, linking these more to gross national product and less to value added tax receipts - a change that will hit Italy. Tony Blair, the UK prime minister, won an undertaking that the UK's EU budget rebate would remain - although Britain accepted this would decline by up to E220m by 2006 because the UK would renounce gains that would have accrued through the implementation of other reforms. Mr Blair said the summit had a "very good result for the UK".

The dollar strengthened to $1.0754 per euro in late New York trading (against $1.0839). Earlier, it reached $1.0713.

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Dollar could gain against euro on Balkan turmoil, analysts say. Concerns about prospect of escalation of the conflict may motivate a "flight to quality". 

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The euro has touched new lows against the US dollar and sterling, as the markets focused on the continuing war in Kosovo and possible interest rate cuts. The euro fell to $1.0683 during trading before closing the European session at $1.0708 from $1.0740 on Friday and at 66.05p sterling from 66.23p. The euro has now fallen more than 8 per cent against the dollar and sterling since its introduction on January 4th. Question: could the euro be heading towards parity against the dollar, if US data continues to strengthen and the interest rate gap between the two areas opens up?

Not every movement in the external value of the euro "amounts to an underlying trend," Bundesbank president and ECB governing council member Hans Tietmeyer said on Monday.  In a speech prepared for delivery in Utrecht, Tietmeyer said  that the general public had been following the progress of the single currency since its launch on January 1 "sometimes with a little too much agitation."
"Not every movement in the external value amounts to an  underlying trend," Tietmeyer said. 

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The Bank of England cut its repurchase rate a quarter-point  to 5.25 percent, as expected. The Bank of England. The European Central  Bank may do likewise later today to spur slowing economic growth  across Europe. The U.K. economy has almost ground to a halt and Germany  and France, Europe's biggest economies, are flagging. Lower borrowing costs will boost consumer and corporate spending and could lead to weaker European currencies, making exports more competitive.

The European Central Bank cut its interest rates by a greater-than-expected half  percentage point, boosting stocks and bonds worldwide on expectations the move will spur flagging economic growth.

Duisenberg (press conference):
"The interest rate decision has been taken in a forward-looking perspective, focusing on  the medium-term trends in inflation and the compatibility of these trends with the Eurosystem's definition of price stability. In the view of the Governing Council, monetary growth is - at the current juncture - not a risk for future price stability.

The decision taken today keeps monetary policy on a longer-term stability-oriented course and, by doing so, contributes to creating an economic environment in which the considerable growth potential of the euro area could be exploited. Those responsible for other policy areas are urged now even more to take the necessary steps to improve longer-term growth prospects for the euro area through strictly and decisively adhering to the aims of the Stability and Growth Pact and through convincing structural reforms in the economy."

The Swiss National Bank also  lowered rates today after economic growth virtually ground to a halt.

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The ECB surprised the financial markets on Thursday by lowering  its key refinancing ("refi") rate to 2.50 percent from 3.00 percent, a much steeper cut than had been expected. At the same time, the central bank's president Wim Duisenberg  gave a very clear signal that in slashing its key rates, the ECB was firing all its shots at once and no further cuts could be expected in the future.

"We wanted the move to be as convincing as possible because we  were afraid that a small step would encourage expectations that another would follow and that this was just a first step," Duisenberg told journalists at a news conference held to explain the move.  But "now you can be sure. This is it," he added.   That viewpoint was shared on Friday by the head of France's  central bank, Jean-Claude Trichet, who also sits on the ECB's policy-setting governing council. "It is a very significant reduction .... we are ending a cycle of a considerable lowering of (interest) rates in Europe," Trichet told Europe 1 radio. "With this reduction, we will have lowered our short-term  interest rates in the euro zone by a total of 1.5 percentage points" since the middle of last year to reach" the lowest level since the Second World War, he added.

Comment from U.S. Treasury Secretary Robert Rubin on the European Central Bank's decision to cut its benchmark refinancing rate by 50 basis points to 2.5 percent: ``It is very important that Europe get again on a path of solid domestic demand-led growth, because it is not healthy for the world economy to have the only major economy that's on that path to be the United States,'' Rubin said. ``I think there is an almost broad-based, and may be a universal agreement, that there's a lot that needs to be in the area of structural reform. ``I wouldn't comment on their monetary policy, but I think their measure speaks for itself,'' Rubin said of the cut.

The euro fell against the dollar in  Europe on Friday in reaction to an unexpectedly big reduction of a half point in the ECB's key interest rate to 2.5 percent.   The euro also remained under pressure from continuing concern  about the conflict in Yugoslavia.  European bond markets rose strongly   The euro was being traded at 1.0799 dollars from 1.0836 here late on Thursday. The dollar firmed to 121.01 yen from 120.82.

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European Central Bank  Chief Economist Otmar Issing said the ECB's unexpectedly deep interest rate cuts this week ``don't signal a change of paradigm,'' adding that the central bank of the 11-nation region will continue to aim for price stability, German newspaper Boersen-Zeitung reported. In an interview, Issing reiterated  that the ECB's decision to lower its set of interest rates was a ``forward-looking'' one, reflecting the ECB's view that there is  no danger of accelerating inflation ahead. Issing also repeated  remarks by ECB President Wim Duisenberg that European governments should liberalize labor markets to help boost job creation.

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The euro slipped back against the dollar to $1.0750 on Tuesday afternoon as dealers reacted to the apparent deterioration of the crisis over Kosovo and the impasse between Russia and the US after the defence ministers' summit meeting in Oslo. The dollar was helped against the euro by a strong flow of positive news, including the continued strength of equity prices and favourable economic data: real earnings in the US in March declined by 0.2 per cent, retail sales rose 0.2 per cent and consumer prices also rose 0.2 per cent. The latter figures showed the first impact at the retail level of the recent rally in the oil price with energy inflation in March, at 0.9 per cent, showing the biggest monthly rise since December 1996.

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European Union  governments pledged to cut their budget deficits even as the  economy slows and the war and refugee crisis in Yugoslavia  saddles the 15-nation bloc with a potentially huge bill.

EU finance ministers promised European Central Bank  President Wim Duisenberg that fiscal belt-tightening is a priority again, while acknowledging that the war could push up  spending and put a further drag on growth. ``War costs a lot of money -- make no mistake about that,'' German Finance Minister Hans Eichel said after chairing a two-day meeting of ministers and central bankers. ``And expulsion costs an incredible amount of money.''

The central bank made clear that after slashing interest rates for the 11 single-currency countries to record lows, it is now up to governments to give business a push by getting rid of regulations and bringing down taxes, especially on labor.

Italian Treasury Minister Carlo Azeglio Ciampi expressed  the strongest concern that the Kosovo war will dent growth in the euro area, which is already expected to slow to 2.2 percent  in 1999 from 3.0 percent last year.

Italy, across the Adriatic Sea from Yugoslavia, temporarily shut three airports because of the war, damaging regional economies. Greece has been forced to reroute cargo to and from northern Europe, adding to costs for business. ``This is a negative element,'' Ciampi said. ``European economic conditions, particularly those in Italy, are worse than expected. This introduces a further element of uncertainty and concern.''

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 The euro fell to its lowest level yet against the dollar on concern funding the war in Kosovo will swell Europe's budget deficits, slow economic growth and deter investors from buying euro assets.   The euro fell as low as $1.0622 and was at $1.0635 in  midmorning trading from $1.0705 Friday in New York.  It then traded as low as $1.0599. The single currency, down almost 9 percent since its Jan. 1 start, also set  a new low against the British pound, dropping to 0.6558 pound.

In other trading, the dollar was little changed at 117.93 yen from 117.84, after falling 2.6 percent against the yen last week as investors bought Japanese stocks.  ``A lot of investors are getting out of the euro and going into Asia,'' said Jeffrey Yu, a senior currency trader at Sanwa  Bank and seller of euros.

European Central Bank President Wim Duisenberg says he's not concerned about the euro's  9 percent decline against the dollar this year and that the bank  is not planning to buy euros to boost Europe's single currency.  Asked at what point the ECB would intervene in foreign exchange markets, Duisenberg told the European Parliament that ``the moment hasn't come yet and I cannot see it coming.'' A weakening in U.S. economic growth as well as concern over U.S. balance of payments deficits would soon enough help the euro strengthen again at some point, Duisenberg said. ``If you take a longer-term view, I see more factors which would point in a direction of a strengthening of the euro than of a weakening,'' Duisenberg said, adding, ``I hope it doesn't go  too fast

The euro's fall against the U.S. currency was most of all  the result of buoyant U.S. growth, though increased ``uncertainty and anxiety'' over the war in Kosovo also had a ``depressing impact'' on the euro's value, Duisenberg said.

Justifying the ECB's April 8 decision to lower borrowing costs, Duisenberg said he sees no signs that euro-area exports  will rise again soon while inflation is poised to remain tame.  Calling the European Commission's forecast of 2.2 percent  growth this year ``somewhat optimistic,'' Duisenberg said that  inflation in euro bloc countries will probably average  1.1 percent this year, well within the ECB's 2 percent annual inflation target. While the overall world economic outlook ``seems to have  improved slightly,'' Duisenberg said, this was ``not yet enough to expect a significant strengthening of the external performance of the euro area.'' 

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 The European commissioner for economic affairs, Yves-Thibault de Silguy, proposed Tuesday that the 11 nations of the euro  zone set up an ''action fund'' to help countries that fall out of line with the single-currency criteria because of external factors.

His comments to the economic and monetary committee of the European Parliament were a response to fears raised by economists that the euro zone has no mechanism to deal with crises that affect some nations or regions more than others and that such shocks could create fracture lines that could undermine the currency.  But analysts said the suggestion that there could be any relaxing of the tight criteria that countries must observe within the single-currency area risked lessening confidence in the euro, which has already has fallen sharply against  the dollar this year because of the prospect of sluggish economic growth in the EU and concern about the Kosovo conflict. On Tuesday, the euro  slipped again as the dollar rose against all other major currencies. (Page 14)

Perhaps because of the timing of Mr. de Silguy's remarks, they were not received warmly by some in Brussels. Graham Mather, a British Conservative member of the European  Parliament, called Mr. de Silguy's statement ''imprudent.'' He predicted that financial markets would demand an explanation - a position that could hint at further downward pressure on the single currency. An initial market reaction, from Lars Pedersen, senior vice president at the Hedge Fund Strategy Group in New York, was scathing. ''If I was a German, I'd say I knew it was going to come to this,'' he said.

Mr. de Silguy said he was not proposing that the community bail out states that fail to run efficient budgets. On the contrary, he said, an action fund - which should be financed out of  budget surpluses - should ''demonstrate the solidarity of the union in the face of circumstances that are totally independent of the political will or the capability of reacting of this or that member state.''What he described as a ''fund to allow resources to be channeled into specific needs'' would, he said, be a complement to greater economic coordination within the EU, which is actively under discussion by finance ministers and experts in the euro zone. He did not specify how big such a fund should be, beyond saying that it should not increase the EU's collective debt.

In no way, he said, should it absolve countries of the need to achieve  balanced budgets and to reduce the tax burden.But even that caveat brought some criticism. ''Obviously solidarity dictates  help if a country is not at fault, and there is no doubt that the hat would be passed around,'' said Stanley Crossick, chairman of the European Policy Center, a think tank. But he said it was ''not a clever idea'' to talk about  setting up a bailout fund when markets are jittery. Institutionalizing the idea of special assistance ''could become a self-fulfilling prophecy,'' he said.

 Mr. de Silguy, who is filling a caretaker role after resigning last month along with the rest of the European Commission, said he was taking the opportunity of expressing a personal view on his last appearance before the  parliamentary committee. A senior aide described his speech as a philosophical reflection for the years ahead rather than as a reaction to any particular circumstance.

He described his views as a starting point for discussion in the context of  the Maastricht Treaty outlining monetary union, which states that  extraordinary financial assistance may be granted by the community if severe difficulties arise in the supply of certain products or if a member state is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, including natural disasters.

Unlike the U.S. Federal Reserve, the European Central Bank has no  mechanism to divert reserves to regions experiencing exceptional difficulties. Its main function is to ensure the stability of the currency, although it is increasingly becoming involved in the debate about economic coordination.

Mark Hendrick, a spokesman on monetary affairs for the Socialist group in the European Parliament, said he was surprised by Mr. de Silguy's statement, maintaining that it contradicted a central premise underlining the single currency: that there could be no bailout for countries in difficulty. ''It  flies in the face of'' the so-called growth and stability pact, which was signed by the countries adopting the single currency, he said.

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Morning: The euro rose for the first time in seven days after Yugoslav President Slobodan Milosevic said he would allow an international presence in Kosovo, fueling hope the conflict in the Balkans may be resolved soon. The euro gained after Russia's envoy to Yugoslavia, former Prime Minister Viktor Chernomyrdin, said yesterday Milosevic would accept a United Nations presence in Kosovo if NATO stops its air strikes and withdraws troops from the region. U.S. and U.K. officials said the offer is only one of the conditions that must be met before NATO end a bombing campaign, now in its fifth week, aimed at ending Yugoslav attacks on ethnic Albanians in Kosovo.

The currency's gains could prove short-lived. The U.S. and U.K. rejected Milosevic's offer, saying it fell short of meeting North Atlantic Treaty Organization demands. If peace hopes wane, so will the euro. ``The recent proposals have been take positively by the market as a step in the right direction,'' said Ulrich Beckmann, head of euro-region research at Deutsche Bank in Frankfurt. ``I'm not sure we are close to a settlement, and we should not be overly optimistic.'' ``The euro demonstrated just how sensitive it is to the fighting in Kosovo,'' said Paul Podolsky, a strategist at BankBoston. Expectations that euro-region economies are headed for a slowdown ``is the core reason that the euro will weaken.''

The euro has weaken more than 2 percent since March 24, when the bombing commenced. Investors deserted the single currency because they're concerned that paying for the war and housing half a million Kosovar refugees will strain euro-11 budgets.

The euro rose to $1.0669 from $1.0607. Yesterday, it fell as low as $1.0560, its lowest level since it was introduced at the beginning of the year. The dollar declined against the yen, meantime, on expectations Japanese Prime Minister Keizo Obuchi will introduce new measures to lift the economy from recession.

Afternoon The U.S. DOLLAR rose against the euro after NATO officials rejected Yugoslav President Slobodan Milosevic's latest attempt  to end the bombing of Yugoslavia, now in its fifth week.  The dollar strengthened to $1.0612 from $1.0646 late yesterday in New York and was little changed at 119.37 yen from 119.53. For the week, the euro fell 0.85 percent against the dollar and the yen fell 1.25 percent as Japanese officials warned a strong yen could squelch any economic recovery.

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The European Central Bank has launched an offensive against critics of the euro, saying the new currency's weakness against the dollar does not mean that its long-term stability is in doubt. Sirkka Hamalainen of Finland, a member of the ECB's six-strong executive board, said the euro's 10 per cent fall against the dollar since its launch in January largely reflected the US economy's strength and concern about the Kosovo war rather than any fundamental problems with the euro. "I would like to underline that it is still too early to make any clear assessment of the final success and role of the euro," Mrs Hamalainen said in a speech to the Bond Dealers Association in San Francisco. "To a large extent, the developments in the foreign exchange markets over the last few months can be characterised as a period of dollar strength rather than euro weakness." Her comments are in line with other remarks by European central bankers and politicians who have begun to hint that the euro has fallen far enough. Dominique Strauss-Kahn, France's finance minister, said last week that "the euro-dollar exchange rate is now close to the lower end of a reasonable range". Since touching a high of 1.1877 against the dollar on January 4, the euro has drifted steadily downwards, closing last Friday in New York at 1.0605. Some economists point out that the euro's weakness is a blessing in disguise, as it has helped European exporters at a time of economic weakness. But Mrs Hamalainen suggested the ECB would not stand aside if the euro continued to fall, saying that in "very exceptional cases" the central bank could send signals to financial markets that it believed the exchange rate was unjustified. Such signals could include "oral intervention", direct intervention in foreign exchange markets and changing interest rates, she said.

Another ECB board member, Tommaso Padoa-Schioppa of Italy, said in Milwaukee last week that the euro-zone's fundamental strengths did not justify a further fall in the euro. Economists said it was significant that both board members made their remarks in the US as financial markets and media there had begun to question the euro's credibility. Some US economists say the ECB's 17-member policymaking Governing Council is so large that it is prone to issuing contradictory signals. Wim Duisenberg, the bank's president, told a European parliament committee early last week that the euro's level against the dollar gave him no cause for concern. Mrs Hamalainen said the euro would gain strength as the European economy improved and as markets took account of the euro-zone's strong external balance compared with the US deficit.

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The European Central Bank doesn't want the euro to lose more of its value, said ECB  President Wim Duisenberg in a signal the bank is hardening its tone following the currency's 8.5 percent fall this year. ``We would frown'' on any further decline, Duisenberg said in a speech on the sidelines of an International Monetary Fund  meeting. ``At the moment, we aren't worried about the exchange rate. But we will monitor it closely and we won't neglect it.''

Bundesbank President Hans Tietmeyer and Bank of Italy  Governor Antonio Fazio, both members of the ECB's 17-member council, gave similar statements earlier this week. They were joined yesterday by their colleague on the ECB rate-setting board  Tommaso Padoa-Schioppa, who said ``I totally agree with the assessment of my colleagues.'' Europe's single currency ``without any doubt has a great potential, and it will rise.''

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The US commerce department said that, in the first quarter of 1999, US GDP grew at a seasonally adjusted rate of 4.5%. Despite this, "inflationary pressures stayed dormant".

After the news, the euro went down to $1.0552, to recover slightly up to $1.058 at the end of the London session. Many observers think that the strong US perfomance makes it more likely that the FED will tighten monetary policy at some point. US treasuries went down sharply. The news also hit the European markets.

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Wim Duisenberg, head of the  European Central Bank, wants to do for the euro what Japanese  Vice Finance Minister Eisuke Sakakibara does for the yen and U.S. Treasury Secretary Robert Rubin does for the dollar. The euro's older peers have mouthpieces. ``Strong Dollar''  Rubin can revive the U.S. currency's fortunes with a few well-chosen words, while ``Mr. Yen'' Sakakibara shepherds the yen higher or lower, sometimes daily. With the economies of the euro 11 nations stuck in a slump, the euro is down 9 percent against the dollar since its January introduction. And because many European politicians welcome that decline as a tool to boost exports and growth, the ECB chief will  have to be the euro's guardian, investors said.

Duisenberg is treading gently in his first efforts to halt the euro's slide. ``We would frown'' on any further weakness, he  warned last week, stopping short of threatening to unleash the ECB's $252 billion of reserves to bolster the currency. Still, those comments are the ``first concrete sign that intervention is likely if the euro falls below $1.05,'' said Kirit Shah, chief strategist at Sanwa International. ``There's no single politician who speaks for the whole of  the European Union and can tend to the euro the way Rubin does  the dollar and Sakakibara the yen,'' said Simon Rubinsohn, who helps oversee 10 billion pounds ($16 billion) at Capel-Cure Myers  Capital Management in London. ``Duisenberg is a figurehead and seen as the individual who'll be able to knock heads together.''

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 The euro's 9 percent fall against the dollar this year is not a concern, although the central bank may intervene in currency markets should the decline be extended, said ECB President Wim Duisenberg.``There's no concern about the weakness of the euro against  the dollar,'' Duisenberg said after a speech at Poland's central  bank.  Europe's top central banker said that war in the Balkans, which has been a drag on the euro in recent weeks, is unlikely to last much longer and hasn't had a ``significant'' impact on the  economic growth of the 11-nation euro zone.

The fact that the ECB hasn't set an explicit exchange rate target ``does not mean -- and it is good to underline this once  more -- that the ECB is indifferent to the external value of the  euro or even neglects it,'' Duisenberg said. ``We constantly  monitor exchange-rate developments, analyze them and shall act on them, if and when it becomes necessary.'' At the same time, Duisenberg warned against exaggerating the euro's decline. It's ``encouraging'' to see that investors on international and capital markets so far have embraced the single currency, and stable prices in the euro area will help best to  make the euro a strong currency.

``Of course, the level of international confidence in the euro is not the only factor determining its external value, nor is the exchange rate the only indicator of confidence,''  Duisenberg said. Any ECB action ``will never be mechanistic, nor  will it be isolated.''

During the week, the European single currency rallied above $1.08  from a low of $1.0551 reached April 30, after the Group of Seven industrial nations and Russia agreed on a framework for a peace accord in Kosovo.

From the press conference:
Question: Have you intervened in the markets in any way to boost the euro? Has the ECB intervened in the markets in any way to boost the euro's value?
Duisenberg: It has not.

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The dollar rose against the euro and yen after NATO's accidental bombing of the Chinese  embassy in Belgrade dashed hopes for peace in Yugoslavia and sent investors to the haven of dollars. The dollar strengthened to $1.0734 from $1.0757 late Friday  in New York. Haven buying of the dollar also boosted the U.S. currency against the yen, to 121.21 yen from 120.81.

Greece dismissed speculation it's seeking entry into Europe's monetary union as early as this weekend, talk that drove the drachma to its lowest level against the euro since the single currency began trading in January. The Greek currency fell as low as 330.10 drachmas to the euro, and then recovered to 326.80 in recent trading, compared with 324.55 yesterday.

An exchange rate target for the single European currency would be ``counterproductive,''
European Central Bank Chief Economist Otmar Issing said, though he added that the central bank won't ``neglect'' the euro.``It would be counterproductive and confusing to aim at a specific exchange rate'' for the euro, Issing said at a meeting of the Danish Society of Financial Analysts in Copenhagen. At the  same time, there is also ``no attitude of benign neglect with regard to the euro exchange rate.''

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Britain is to sell more than half its $6.5bn gold reserves over the next few years, dealing another blow to the metal's diminishing role in the international monetary system. In response the gold price fell more than $8 at one stage to less than $280 a troy ounce. Gold mining companies saw their share prices fall sharply, with the currencies of gold producing nations also suffering. The Treasury said it would sell 125 tonnes of gold in this financial year. Similar amounts will be sold in succeeding years until official holdings have been reduced from 715 to 300 tonnes. Gold has long enjoyed a near mythical importance in the minds of central bankers, as a hedge against inflation and a symbol of monetary stability. But a new generation thinks it more important to increase the return that reserves earn. The Treasury will replace the gold with foreign currency assets, mainly government bonds. These will be split into roughly 40 per cent US dollars, 40 per cent euros and 20 per cent Japanese yen - in line with the existing composition of reserves.

Gold's share in the government's $15bn net reserves will fall from nearly half to around 20 per cent. Studies cited by the Bank of England last year suggest this proportion "provides a reserve composition exposed to least risk". The European Central Bank holds 15 per cent of its reserves as gold and the UK would have had to contribute 140 tonnes had it chosen to join the euro. Initially gold will be auctioned every two months from July. Buyers will be offered 400-ounce bars held in vaults beneath the Bank of England. The Bank would prefer buyers to leave the gold there, although it says "physical collection . . . will be possible". Kelvin Williams, marketing director of South African mining group Anglogold, argued the UK had "given everyone an opportunity to speculate against them upfront". He was puzzled at the choice of sales method, but is confident the market will absorb the sales "comfortably". Yesterday's unexpected move prompted nervousness about sales by the world's first division gold holders.

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European Central Bank  council member Tommaso Padoa-Schioppa said that ``looking ahead   we see more reasons for (the euro) to be strong than markets   have seen recently,'' adding he did not see in the economy of  the 11-country single currency region factors that could justify  a further decline in the euro against the dollar, Italian financial daily Il Sole/24 Ore reported in an interview. ``It is   the dollar that is strong and has gained against all currencies,  not the euro that is weak,'' Padoa-Schioppa said, adding that   the euro had also been weighed down by the conflict in Kosovo, as shown by the euro's gains last week on hopes the conflict   will end soon. Padoa-Schioppa also said he was optimistic the euro zone economy would recover from its slowdown, saying that growth in the euro bloc countries, apart from Germany and Italy, was ``satisfying'.'

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The euro slipped back early on Monday  against the dollar in European trading after hopes for peace in Kosovo were dented by the bombing of the Chinese embassy in Belgrade by NATO, while the yen remained stable against the greenback.  The euro was changing hands at 1.0741 dollars as against 1.0788 on Friday evening.

The German government will discuss the appointment of a successor to Bundesbank President  Hans Tietmeyer tomorrow, as a German newspaper reported that Bundesbank council member Ernst Welteke is the prime candidate for the job. Replacing Tietmeyer ``will be on the agenda'' of tomorrow's weekly cabinet meeting, a government spokesman said.

Welteke, finance minister in the state of Hesse when German  Finance Minister Hans Eichel was the state's prime minister, has been seen as the most likely candidate for the Bundesbank's top position since the SPD won the election in September last year. He is a member of German Chancellor Gerhard Schroeder's Social Democratic Party.

The German central bank's council, which under German law has an advisory role in the nomination process, will discuss the  Tietmeyer succession on Wednesday at its biweekly meeting, the Sueddeutsche Zeitung said, without citing sources. Welteke, 56, would take the Bundesbank post as well as Germany's seat on the European Central Bank Governing Council  when Tietmeyer, 67, retires in August.

European Union finance ministers backed market oriented reforms to stimulate growth and cut unemployment.In a preliminary discussion, ministers accepted with few reservations a draft of this year's "broad economic policy guidelines", put forward by the European Commission. The guidelines, which will be refined for adoption by the EU summit in Cologne on June 3-4, serve as the basis for policy co-ordination among the 15 member states.The guidelines lay out reforms to improve the working of goods, services and capital markets, and outline measures to make labour markets flexible.

In a similar exercise last year, the ministers, assembled in the "Ecofin" council, took offence at the Commission's attempt to prescribe policy options and diluted its recommendations. But the launch of the euro on January 1 has encouraged ministers to support the guidelines and Mr Lafontaine's resignation two months ago has removed one of the principal opponents of the Commission plan. Hans Eichel, German finance minister and successor to Mr Lafontaine, yesterday urged ministers and officials not to water down the recommendations.

Symbolising the change in mood, Carlo Azeglio Ciampi, Italian treasury minister, urged an acceleration of structural reforms to improve the efficiency of Europe's economy.Patricia Hewitt, economic secretary to the Treasury who stood in for Gordon Brown, UK chancellor, said the EU's proposed employment pact - to be agreed at the Cologne summit - should be called the pact for employment and economic reform.

Addressing the Euro-11 group of ministers from countries participating in the EU's single currency, Mr Ciampi argued that lower taxes were "the main prerequisite for higher growth and job creation". The member states "should pre-commit themselves to a path of equal and simultaneous reduction in taxation and current government expenditure".

Strengthening structural reform with the aim of improving competitiveness will be one of the main elements of the employment pact, which was discussed by ministers with representatives of Europe's trade unions and employers' federations yesterday. Mr Eichel, who chaired yesterday's meetings, said the pact would seek to co-ordinate monetary, fiscal and wages policy with the aim of boosting employment and growth. But implementation would remain a national responsibility. 

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The German government nominated  Ernst Welteke as Bundesbank president, signaling a new era for  Germany's central bank as a Social Democrat was called on to  replace a Christian Democrat with a reputation for holding firm  against inflation.  Welteke, a 56-year old former politician, will succeed  Bundesbank President Hans Tietmeyer when he retires in August and will also take Germany's seat on the European Central Bank's Governing Council, the monetary policy-setting body for the 11  countries that have adopted the euro common currency.

 Tietmeyer, who has headed the German central bank since then- Chancellor Helmut Kohl's administration appointed him in 1993, tied for second in a Bloomberg Magazine ranking by economists of  ECB council members' anti-inflation policies. In a separate poll  of Bundesbank council members, Welteke ranked as being much less  interested in fighting inflation.  ``Welteke is certainly more of a politician than Tietmeyer  was: more pragmatic, less academic,'' said Eckhard Schulte, an  economist at the Industrial Bank of Japan. ``Welteke probably  won't stand in the way of stronger interaction'' between monetary  policy and fiscal policy, though he ``also fits well into the ECB council.''

 German Finance Minister Hans Eichel said he had  nominated Welteke for the post, calling him ``a very good man.''   Eichel, who has been in office for about a month, said he didn't expect the government's relations with the Bundesbank to change. ``Two weeks ago in Washington (at the IMF's spring  conference), it was clear that I worked well together with  Bundesbank President Tietmeyer and I believe that my work with Mr. Welteke will be the same,'' he said.

While Welteke is rated as less concerned about inflation than Tietmeyer, analysts said his impact on ECB interest-rate  policy will be limited as he's just one of 17 rate-setting members.``Welteke has a reputation as a dove, though in a low- inflation environment and as one of 17, the relevance of this is now limited,'' said Alison Cottrell, an economist at PaineWebber International in London. ``His key task will be reorganizing the overstaffed Bundesbank.''  Welteke's main job will be to overhaul the Bundesbank which with 15,891 employees is considered by economists to be  overstaffed since it ceded rate-setting powers to the ECB.

The Bundesbank, which under German law has an advisory role  in the nomination process, will discuss the government's proposal  at its biweekly meeting tomorrow. It's unlikely to make any  objections.

Welteke, a member of Chancellor Gerhard Schroeder's ruling  Social Democratic Party, has been seen as the most likely candidate for the Bundesbank's top position since the SPD won the  parliamentary election in September. His chances increased when  Eichel, under whom Welteke served as finance minister in the  state of Hesse, became Germany's finance minister this spring.

A trained economist, Welteke has spent most of his career as   an SPD activist on the local and regional level in Hesse. He was  chairman of the SPD caucus in the Hesse state parliament from   1984 to 1991 until he became first economics minister and later   finance minister in his home state.   While both Tietmeyer and Welteke used to be politicians, a lot sets the two apart. Welteke is seen as more outspoken, less   worried about inflation and more tolerant of public criticism.  He's also been a strong promoter of Frankfurt's interests in the city's rivalry with London as Europe's No. 1 financial center.

 In January, Welteke urged a reform of the 11 national central banks in the euro area, suggesting each take a specific role rather than continue to operate as a full-service  independent central bank. When Oskar Lafontaine, Eichel's predecessor as finance  minister, drew criticism for his repeated calls on the ECB to cut  rates, Welteke defended him, saying the new SPD-led government in Bonn should be free to lobby the ECB if it wanted to.  In November he told journalists the euro-11 nations could  cut rates in a coordinated fashion to prepare for the single currency's start. Three weeks later, on Dec. 3, the 11 countries   did just that, with all but Italy lowering their benchmark rates   to 3 percent.    Welteke is also seen as more tolerant of inflation. His preference for lowering borrowing costs to stimulate the economy  led 14 private analysts in a Bloomberg survey last year to vote  him the fourth-ranked ``dove'' on the Bundesbank council.

Welteke received a score of 3.4 out of 10 in the poll, in  which 10 signified an inflation ``hawk'' -- someone likely to  support a rate increase at the first sign of inflation. As the  German central bank's president, Welteke will sit on the ECB  council with former Bundesbank chief economist Otmar Issing, now  ECB chief economist, who scored 8.8 in the survey.   In a separate poll of ECB members, Issing also ranked as the  central banker who took the strongest policy stand against  inflation while Tietmeyer, Bundesbank president since October 1993, tied for second place with Bank of Italy Governor Antonio Fazio.

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The euro weakened sharply against the  dollar on Wednesday morning in European trading following the decision by Russian President Boris Yeltsin to sack his Prime Minister Yevgeny Primakov.  At 9:20 a.m. (0820 GMT), the euro had fallen back to 1.0687  against the dollar from 1.0726 here on Tuesday evening and 1.0724 a little earlier in Tokyo.    Dealers said the main concern was that a change of government in  Russia could harm prospects for a Kosovo peace settlement. Moscow last week signed up to a set of western-backed principles for solving seven-week Balkans crisis.

The euro fell back as the bombing of Yugoslavia intensified,  while Russian President Boris Yeltsin threatened to pull out of
international attempts to forge a peace settlement there.

Also, the dollar rallied on news that Lawrence  Summers will replace US Treasury Secretary Robert Rubin when Rubin leaves office in July.  The euro was being traded at 1.0653 dollars from 1.0673 and the dollar was being traded at 121.46 yen from 121.43 yen earlier in Tokyo and 120.82 yen here late on Wednesday. Analysts said that the dollar had gained from international support for the future US finance chief.

During Rubin's tenure, the dollar rallied from a postwar low of 79.75 yen reached in April 1995, climbing more than 50 percent. it gained 2.8 percent a year, according to a Federal Reserve index that charts the dollar against the currencies of  the U.S.'s major trading partners.``The strong dollar policy which was a hallmark of Rubin's tenure will undoubtedly be continued by Summers,'' said Graham Edwards, managing director of European foreign exchange sales at Merrill Lynch. Meantime, ``the yield pick-up that Japanese investors can earn by investing overseas is at its best level for some time, and that's encouraging capital outflow out of Japan.'' 

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The Japanese current-account surplus grew 17.6 percent to a record in  the year that ended March 31, officials said Monday, but a sharp fall in March signaled that it may have peaked.

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The dollar fell against the yen as the Federal Reserve Board shifted its policy bias toward an increase in interest rates in coming months to ease inflationary pressures.

Market moods are summarized by statements like the following: ''The dollar may initially take a hit,'' said Jay Bryson, an economist at First  Union Corp. in Charlotte, North Carolina. ''But over the next few days, it  could be dollar supportive because it shows the Fed is serious about its  inflation-fighting mandate. Inflation is never good for a currency.''

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The dollar rose to a seven-month high against the yen  Wednesday after the Federal Reserve Board policymakers said Tuesday that they were considering raising interest rates, a move that would make  returns on dollar deposits more lucrative.

Stock prices rose Wednesday as the bond market rallied on optimism over the Federal Reserve Board's resolve in fighting inflation. The Dow Jones industrial average closed 50.44 points higher at 10,887.39.  The Nasdaq composite index rose 19.04 points to end at 2,5877.40 and  The Standard & Poor's 500 index rose 10.89 points to 1,344.21.  Stocks followed bonds higher as the 30-year Treasury posted its biggest gain in two and a half months as investors took encouragement from  Tuesday's announcement that the Federal Reserve was leaning toward  raising interest rates to deter a pick-up in inflation.

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The European Central Bank kept interest rates unchanged Thursday, suggesting that the central bank believes its rate cut  last month was enough to spur growth in the 11-nation euro zone's  economy.

A key business climate index in Germany unexpectedly went down and the Bundesbank said there were no clear signs of expansion in the euro-zone. Germany's Ifo index, which is regarded as a good indicator of trends in the euro, fell to 89.7 in April from 90.2 in March, suggesting that the German economy may take longer than expected to recover from the contraction of the last three months of 1998. The Bundesbank reinforced the disappointing message, saying in its May monthly report: "So far, it must be said that there are no clear signs of an early and strong acceleration in the pace of expansion in the European Monetary Union area."

The U.S. trade deficit swelled to a record for the third straight month in March, highlighting the downside of America's thriving economy. The deficit widened 3.1 percent, to $19.7 billion, from the previous record of $19.1 billion in February. Some economists had forecast that it would  narrow to $18.5 billion. Yet, the dollar kept rising against the euro. Markets concentrated on prospects for higher U.S. interest rates and continued economic growth.

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The dollar rose strongly against the euro Friday on  expectations that U.S. economic growth will outpace that of the 11 nations that adopted the single currency.

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The dollar registered its biggest drop against the yen in almost a month, dragged down by a decline in U.S. stocks.  The dollar fell to 123.06 yen from 124.00 late Friday. The  dollar also gave up gains against the euro, which recovered to $1.0589 from $1.0584 Friday. Trading volume was less than normal    because many traders were on vacation for the Whit Monday holiday in Europe, exaggerating moves in exchange rates.

The Dow Jones Industrial Average fell 99 points, or 0.9  percent, to 10,730. The Nasdaq Composite index fell 1.9 percent.  The euro fell earlier, nearing its all-time low versus the dollar, on concern that fighting in Yugoslavia will drag on as  NATO leaders move toward introducing ground troops.

The euro has now given up most its gains since it jumped  earlier this month on warnings from European Central Bank  President Wim Duisenberg and Bundesbank President Hans Tietmeyer    that a weaker euro was unwelcome. Since climbing to $1.0792 on  May 6, it's fallen 2 percent.

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The euro-zone's consumer price index for April is expected to show a rise in annual inflation to 1.1 per cent, up from 1.0 per cent in March and 0.8 per cent in February. Thus, inflation remains well below the 2 per cent ceiling -- that defines price stability according to the European Central Bank. Yet, in its May monthly report, the ECB warns that rising energy prices are likely to cause a continuing rise in inflation over the coming months. In addition, a weak euro means higher costs of imports.

The dollar was weaker against other  major currencies Tuesday, held back by concern that an  increase in U.S. interest rates will hurt stocks. In 4 P.M. trading, the dollar fell to 122.535 yen from  123.130 yen and    to 1.5012 Swiss francs from 1.5115 francs. The pound  rose to $1.6043 from $1.5977. The dollar, in choppy trading, was slightly weaker  against the euro, with the single currency gaining to  $1.0615 from $1.0597. Concerns about interest rates, combined with hints from Japanese and European officials that they would not let  their currencies weaken too much, could further slow the dollar's year-long advance.

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A U.S. senator has backed off his veiled threat to block the Senate confirmation of Lawrence Summers as Treasury secretary, but clouds apparently still remain over a quick confirmation of Mr.  Summers. Senator Mike DeWine of Ohio had said Monday that he and other Republican senators from steel-producing states were considering putting a hold on the nomination of Mr. Summers in a dispute with the White House over  imports of cheap foreign steel.

The comment sparked fears of a potential glitch in the plans for a smooth transition at Treasury, where President Bill Clinton has named Mr. Summers, the  44-year-old deputy secretary, to succeed the outgoing  secretary, Robert Rubin.

 The White House chief economist, Janet Yellen, said Wednesday that global economic prospects have  markedly improved but that continued growth relies too  much on the United States as the world's locomotive.    She told ministers of the Organization for Economic   Cooperation and Development that the expected 3.6 real  growth in the United States was welcome news in Washington, given pessimistic predictions last autumn.

The U.S. performance ''has been particularly beneficial to the world economy by providing a strong and growing market as emerging-market countries struggle to adjust,'' she said. Ms. Yellin's comments came at the start of the OECD's two-day annual general meeting, where delegates will discuss unemployment and trade issues, although they had the liberty to range over a wide array of other topics.

She said the combination of sustained strong growth of domestic demand in the United States and weak growth  among the U.S. trading partners, particularly the  European Union and Japan, had led to ''a major  deterioration in U.S. trade and current account balances.'' The OECD has predicted that the U.S. current account will register a deficit of  $300 billion this year and $320 billion in 2000. Unless this imbalance is redressed, she warned, protectionist pressures could return. That view was  backed up by the OECD's trade union advisory  committee, which warned that over-reliance on the  United States posed ''huge risks'' and asked how much  longer such a ''fragile situation'' could continue.

Ms. Yellen said that for the moment, she saw ''really no sign of inflationary pressure'' in the U.S. economy, with productivity unusually strong. ''America's blood pressure remains excellent,'' she said. Ms. Yellen said both the European Union and Japan  needed to do more to improve their economic performance, since the global situation remained difficult  and ''downside risks have by no means disappeared.'' With sluggish growth predicted in the larger countries this year, the European Union needed to undertake structural reforms to increase private investment and jobs. Japan needed ''to continue to implement stimulus measures, utilizing all available tools, until strong and sustainable domestic demand-led growth is restored.''

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EU finance ministers allowed Italy to ease its deficit goal for 1999 to 2.4 percent of gross domestic product  from 2.0 percent, after Italian Treasury and Budget Minister Giuliano Amato requested the extra room for maneuver in view of  lower-than-expected growth. Italy is expecting growth of 1.5 percent this year.

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The euro touched an all-time low  of $1.0399 on "investor concern that single currency  members are easing their deficit targets". The euro closed  yesterday at $1.0429, having fallen 1.7 percent in the last week. Since its introduction on Jan. 1, the currency has lost 11.9 percent of its value against the dollar.

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German and French  leaders urged Italy to step up efforts to cut its deficit, while stressing that a European Union decision granting the country more leeway in 1999's budget won't undermine the euro. Their comments came after the drop in the value fo the euro on Friday May 28.

``The deficit is the enemy of the future,'' said French President Jacques Chirac after a Franco-German summit in Toulouse. ``We mustn't weaken our efforts to tackle these problems. Italy must pursue deficit cuts. I have total confidence in the euro.'' The decision to ease Italy's budget targets was ``a one-off,'' said German Chancellor Gerhard Schroeder. ``This doesn't mean any of the member states are departing from a strict budgetary course,'' Schroeder said. ``I don't  think it's appropriate to worry about the stability of the euro.'' German Finance Minister Hans Eichel said he and his French counterpart Dominique Strauss-Kahn ``were not happy'' with Italy's request. ``Italy must make more efforts to reach a deficit of 1  percent of gross domestic product in 2001,'' he said. Note however that under the terms of the stability pact for countries which adopt the single currency, governments aren't permitted to let their deficits exceed 3 percent of GDP and must aim for a  balanced budget in the medium-term. Eichel said Europe's single currency has ``potential to  rise,'' adding that it's a ``common policy'' of finance ministers in the 11-nation euro-zone to seek a strong euro. French Prime Minister Lionel Jospin said member countries  in the single currency should ``set goals they can keep to.'' The euro has ``real potential to appreciate'' he said, though added there is no reason ``to be excessively worried'' about the  level of the euro.

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As the euro sank to $1.035, European Central Bank chief Wim Duisenberg said he remained confident that the new European single currency is sound, and would eventually turn around. "I am inclined to play down short-term volatility in the exchange rate" -- he said.

As regards the decision by Italy to increase its 1999 deficit target up to 2.4 percent of GDP, Mr. Duisenberg noted that Italy was not breaking the rules -- but warned against fiscal laxity spreading in the EMU. "If that were to become a trend, the there would be a real reason for concern", he said.

Earlier in the week, Otmar Issing said that Italy's decision "send the wrong signal at the wrong time".

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The euro touched the $1.0270, its weakest level yet since its Jan. 1 introduction, and recently traded at $1.0296, down  from $1.0324 in late New York trading yesterday. The dollar was little changed at 121.55 yen, compared with 121.50 yen in late  trading in New York.

The euro fell to its lowest level yet against the dollar amid skepticism acceptance of a peace plan by Yugoslavia will end the war in Europe any time soon, bringing back investment to the region. Yugoslav President Slobodan Milosevic's government yesterday accepted a plan by the Group of Eight industrialized nations to end the 10-week-old war by agreeing to pull Serb troops out of Kosovo. Still, U.S. President Bill Clinton and other western leaders expressed caution.

Haruhiko Kuroda, director-  general of the Japanese Finance Ministry's international finance bureau, on the value of the Euro: ``Despite the Kosovo situation, I don't see any reason for the euro to weaken. I'm not particularly concerned''.

European Union leaders failed to see eye-to-eye on the need for a collective  statement to bolster the euro, even as the currency hovered near record lows against the U.S. dollar.  Dutch Finance Minister Gerrit Zalm complained that leaders gathered at a two-day summit were unable to speak with a ``unanimous'' voice on the currency and that they would strive for a harmonious position in talks over dinner tonight.

The wavering gave the impression that EU leaders and central bankers are divided over seeking an end to the five-month-old decline in the euro's value, which has seen the currency depreciate 11 percent against the U.S. dollar, and that, deep down, they are happy to have a weakened euro shore up trade and be the catalyst of an economic recovery.  ``There's no one person who really speaks for the euro,'' said Edie Gorman, a political analyst at Warburg Dillon Read in London. ``There's no leader.''

European Commission President-designate Romano Prodi demanded the power to fire individual commissioners as he outlined a plan to stamp out mismanagement in the European Union's discredited executive arm. Prodi, who got the EU's top job last month after the 20- member commission resigned amid charges of financial mismanagement, said such power is necessary to restore the agency's damaged credibility. ``Recent events have shown the weakness in the current system,'' Prodi said. ``This arrangement will guarantee the accountability of each commissioner.''

The old commission, still in office on a caretaker basis, has been operating in a power vacuum since its March resignation. While it's continued conducting day-to-day business, it has  stopped short of drafting new legislation and taking other political initiatives. Prodi's commission won't take office until his 19 yet-to-be- named nominees are approved by the European Parliament. That may not happen until September or later.

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The euro fell to its lowest level against the dollar as talks between NATO and Serb commanders about ending the war in Kosovo broke down. Jeremy Fand, a currency strategist at BankBoston Corp.in Boston said . ``There's also the realization that after the war is over, there will be a massive cost placed on Europe to rebuild Kosovo, which will stretch their budgets.''

The euro dropped as low as $1.0258 from $1.0376 late Friday in New York. It was recently at $1.0294, bringing its decline since the start of the year to 11.7 percent. The dollar fell to 121.33 yen from 122.12 Friday amid sales of euros for yen. Such trades are often executed through the dollar, as traders sell euros for dollars, then sell those dollars for yen. The euro fell to 124.87 yen from 126.86. The main culprit of euro sales for yen were Japanese funds, who had loaded up on European assets last year on optimism about the benefits of monetary union, Fand said.

Clean-up and rebuilding in the aftermath of the war could  put pressure on European budget deficits, traders worry.  Italy created a stir two weeks ago after it said it needed  to relax its 1999 budget deficit to 2.4 percent of gross domestic  product from its previous target of 2 percent. While that's still within the 3 percent limit euro nations have committed to, it suggests increased pressure on European budgets.

Forecasts

The euro could fall as low as $1.017 by the end of this month, according to the consensus forecast of 19 traders, strategists and investors polled by Bloomberg News.  BankBoston's Fand predicts the euro will fall to 90 U.S. cents by year-end and that the entire monetary union will start to fall apart the middle of next year.

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The euro posted its biggest one-day gain so far, after a report showed Germany's economy grew more than expected  in the first quarter, generating optimism for a recovery in the euro region. That followed another report showing a larger-than-expected gain in April manufacturing orders. ``We have had a significant step forward (toward) brighter prospects on Kosovo,'' said Stephen Hannah, director of research  at IBJ International. Also, ``the German GDP figure, together with the manufacturing data, were undoubtedly strong and  challenge the gloomy outlook'' for the euro region.

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The euro rose for a second day on hopes growth will rebound in the 11 nations that adopted the common currency in January, and on speculation that NATO and Yugoslav military commanders will agree on a Kosovo peace plan.  ``Good economic data from Germany and the prospect of good  news from Kosovo mean the euro could keep going this way for the  next couple of days,'' said Stefan Masannek, a trader at Landesbank Schleswig-Holstein. ``Though this is not a trend  change, the euro could rise to $1.06.''

Comments by European officials also bolstered investor confidence in the euro. Bundesbank President-designate Ernst  Welteke said after markets closed yesterday that the euro's drop   is ``reason for concern.'' Austrian Finance Minister Rudolf   Edlinger said today he would ``be happy'' with the euro at  $1.15, and that he expects the currency to gain.

The euro rose to $1.0474 from $1.0441, still down more than 10 percent since it was introduced. The U.S. currency held losses that drove it to a six-week low against the yen yesterday, as  U.S. 30-year yields rose to 6 percent for the first time since May 1998 and stocks slumped. Investors selling U.S. securities often convert the dollar proceeds into other currencies. The dollar was recently at 119.10 yen, from 119.27 yen yesterday.

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The dollar fell against the yen Friday amid optimism that the Japanese economy may be starting to rebound. The yen is up about 3.5 percent against the dollar this week. Prime Minister Keizo Obuchi of Japan said Friday he would ''do what I have to as soon as possible to inject life into'' the economy.

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The dollar was sharply higher against the yen late Monday, rising after the Bank of Japan sold yen for the second time in a week to curb a rise in the currency that could threaten Japan's recovery. The dollar was at 120.525 yen in 4 P.M. trading, up from 117.955 yen Friday. The Japanese central bank bought about $5 billion with yen on behalf of the Ministry of Finance, traders estimated, producing the biggest one-day decline of the Japanese currency in four months.

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 The euro fell against the dollar after reports showed Italian industrial production slowed more than expected and Spanish retail sales slipped, fueling concern the economies of the euro 11 nations won't soon rebound. ``We don't think the euro's a great buy right now,'' said  Rhys Herbert, who helps manage 120 billion pounds ($192 billion)  at Prudential Portfolio Management. ``It's premature to get too  optimistic about euro land growth. There are still things you need to be concerned about in the euro region.''

The euro fell as low as $1.0381, down from $1.0424 late yesterday. It's lost 11 percent of its value this year against the dollar on expectations U.S. growth will outstrip that of the  euro 11 nations. The dollar was little changed at 120.57 yen,  compared with 120.51. ``We're not particularly bullish on the euro,'' said Uwe Fuehrer, the head of currency sales at Credit Agricole Indosuez. ``With growth not really accelerating yet, I don't think people have a tremendous appetite for European assets,''

The euro is nearing the low of $1.0258 reached last week,  before better-than-expected reports on Germany's economy carried the euro to as high as $1.0548 Friday.

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America's trade deficit held steady at a record high in April, with some signs that U.S.companies may be seeing relief from a global financial crisis that has depressed overseas markets. The Commerce Department said Thursday that the April  trade deficit was $18.9 billion - matching a revised estimate of the deficit in March. The government's original estimate pegged the March deficit at $19.7 billion. The revised figure for March, however, was still  a record that was tied in April. Many analysts predict that the picture will continue to deteriorate this year. For the first quarter, the trade deficit widened to a record as exports faltered and imports gained momentum, the Commerce Department said.

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The Bank of Japan is ''attempting to put a solid cap on the  yen against the dollar and the euro,'' said Chris Iggo, chief international economist at Barclays Capital. For  policy reasons, the Japanese don't want the yen   strengthening and making it harder for their economy to recover, he said.

The move had an immediate effect on markets. In 4 P.M. New York trading, the euro was quoted at $1.0391, up from $1.0340 at the close Thursday, and the dollar was  trading at 120.45 yen, up from 119.28 yen.   Prime Minister Keiko Obuchi of Japan, in bilateral talks with Chancellor Gerhard Schroeder of Germany at the meeting of the Group of Seven industrialized nations in Cologne, said he would like to see close cooperation on  world markets regarding the yen and the euro, according to Japanese delegation officials.

The Bank of Japan had already intervened twice this   month to try to slow the rise the yen, seeking to keep it at  about 120 to the dollar. A strong yen hurts Japan's exporters by eroding overseas revenue and might thwart  efforts by Japanese policymakers to spark a recovery in the world's second-largest economy.

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The euro fell sharply Monday after the  president-designate of the European Commission, Romano Prodi, was quoted as saying that Italy's inflation rate could endanger the country's continued participation  in the single currency. Mr. Prodi quickly denied the reports, saying he was quoted in an ''ambiguous and wrong way.'' Nevertheless  the incident, which took place on the same day that the new head of the Bundesbank tried to talk up the euro, served to underscore market concerns about the inability  of senior European policymakers to speak with a single  voice about the single currency.

''It's a sign of incoherence,'' said Jim O'Neill, a currency strategist at Goldman Sachs International in London. ''It adds to peoples' feeling that there's no coordinated leadership in the EU hierarchy in terms of economic policy.''

Addressing a conference of the Italian chemical industry  association Federchimica via a video link-up, Mr. Prodi  noted that inflation in Italy was running about 1  percentage point higher than in Germany and France. He also stressed the importance of keeping costs down to maintain competitiveness. If Italian inflation continues to run at a higher rate, ''it  will be more difficult to remain in the euro,'' Reuters quoted Mr. Prodi as saying.

The report immediately sent the euro tumbling, overriding  the impact of comments by the Bundesbank president-designate, Ernst Welteke, who predicted that stronger growth in Europe would support the euro, and intervention in support of the euro by the Bank of Japan. In 4 P.M. trading in New York, the euro was changing hands $1.0352, down from $1.0388 Friday

Mr. Prodi quickly clarified his remarks, telling Reuters  he was stressing the need for industrialists to maintain  Italy's competitiveness inside the euro zone. He said there was ''no chance in any case of leaving EMU,'' or economic and monetary union.

More on exchange rate intervention

Japan sold its own currency again Monday and signaled that it was willing to let the yen drop   sharply to support the economy and help the nation's   flagging exports.   The aggressive intervention in the currency market by the Bank of Japan and strong words for a weaker yen from  Japan's deputy minister for international affairs, Eisuke  Sakakibara, came just as fresh data showed that exports in May slumped across the board. Japan's exports dropped 11.8 percent in May from a year earlier, outpacing a 3.3 percent import decline to narrow the nation's trade surplus for the second consecutive month.

''Further weakening of the yen is possible if it is necessary for the economy,'' Mr. Sakakibara said. ''We  are flexible on foreign exchange.'' Japan is ready to ''take decisive action'' again to stem a premature rise in the yen, he said. ''What is of paramount importance is to ensure Japan's economic recovery as soon as possible.''

''We're now beginning to see a recognition that the currency has to be used to support economic growth,''  said Andrew Shipley, an economist at Schroder Securities Japan. ''This shift in policy is significant. It could point to substantial yen weakness in the days ahead as the government finally resorts to using a weaker currency to prop up a continued fragile economic recovery.''

Trade dispute

President Bill Clinton and European Union leaders papered over their trade differences on  banana imports and beef hormones on Monday and called for increased cooperation in food safety, services and  biotechnology. ''We decided not to have unresolved trade disputes define  our relationship on all fronts,'' Mr. Clinton said after meeting with EU leaders. ''We must not let them cloud the  fundamental soundness of our relationship.''

In April, the United States imposed $191 million in sanctions on EU goods ranging from handbags to truffles, aiming to pressure the EU to adopt a new banana import  system that would abolish import quotas. The EU rules  favor bananas from Europe's former African and Caribbean colonies over Latin American bananas exported by U.S. companies such as Chiquita Brands International Inc. and Dole Food Co.

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The euro fell against the dollar Tuesday after weak economic figures were released in France and Germany, undermining investor confidence in the euro region.But the dollar dropped against the yen amid no sign of  intervention by the Bank of Japan, which sold its  currency four times in the last two weeks to halt its rise. The yen also gained on the euro.

''There's continued bearishness about the euro,'' said  Jeremy Fand,  a strategist at BankBoston in Boston. ''The euro's drop is coming from the absence of BOJ intervention and weak European data. We could see a new low in the euro today.''

Japan's finance minister, Kiichi Miyazawa, said Tuesday that recent intervention had been aimed at pre-empting an  unjustified rise in the yen, not bolstering economic  growth.

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The dollar fell against the euro Thursday as U.S. stocks and bonds declined on concern the Federal Reserve Board will raise interest rates several times in coming months.

''The euro is responding to the weakness in U.S. asset markets,'' said Bob Lynch, a currency  strategist at Paribas Corp. ''Higher interest rates are weighing on the stock and bond markets, and on the dollar as a result.''

The dollar's drop against the euro lifted the single European currency to $1.0414 from $1.0333 Wednesday. The Fed's policy-making committee meets on Tuesday and Wednesday.

The dollar was unchanged against the Japanese currency, holding at 121.880 yen in 4 P.M. trading. Traders were worried that the Bank of Japan might sell yen for a fifth time this month to help sustain a rebound in economic growth kept yen buyers on the sidelines.  The central bank has ''managed to create apprehension in the foreign exchange market,'' said Kevin Logan, senior market economist at Dresdner  Kleinwort Benson. ''They've intervened not only in Tokyo, but in also in Europe. It creates the impression they could come in at any time at any  place.'' A stronger yen threatens to slow growth because it hurts exporters.

US Stocks fell along with bonds Thursday on concern that the  Federal Reserve Board would start a series of interest-rate increases, slowing economic growth and hurting corporate earnings, when its policy-making committee meets next week.

''The Fed promised us at least one punch in the nose,'' said Jim Griffin, a senior investment strategist at Aeltus Investment Management. ''It's starting to sink in that we could see more of this down the road.''

 More than two stocks fell for every one that rose on the New York Stock Exchange. The Dow Jones industrial average closed 132.03 points lower at 10,534.83. Broader indexes also fell, as the Standard & Poor's 500 slipped 17.28 points to 1,315.78 and the Nasdaq lost 44.06 points to 2,554.07.

Orders to U.S. factories for manufactured goods jumped 1.4 percent in May, led by gains in aircraft, cars and other transportation items, the Commerce Department said Thursday. The increase followed a steep 2.3 percent decline in April and a 2.9 percent gain in March. It was the ninth  increase in the past 12 months.

Such signs of economic strength could prompt the Fed to raise rates more than the widely expected increase of 25 basis points to head off  inflation, analysts said. Bonds reacted, with the price on the benchmark 30-year Treasury bond falling 8/32 to 87 19/32. The yield rose to 6.16 percent from 6.14 percent.

The Fed will raise rates next week ''without a doubt,'' said David Schroeder, portfolio manager at American Century Investment Management. After that, ''there's potentially one, maybe two more tightenings,'' he said.

Hans Tietmeyer, the president of the Bundesbank, said Thursday that the German economy was showing  increasingly positive signs of economic recovery and that the inflation outlook remained favorable.

''The picture of the German economy is still a mixed one, but there are increasingly positive signs for positive development in the future,'' Mr.  Tietmeyer said after a meeting of the Bundesbank council in Munster. Once a year, the council meets outside of Frankfurt.

''The inflation trend has reached its turning point, but there is no deterioration of the price climate,'' Mr. Tietmeyer said in one of his last  public appearances before he steps down as head of the central bank at the end of August.

Data released Thursday showed that German factories and farms refrained from raising prices for their goods in May. The producer price index was unchanged in the month after rising 0.6  percent in April, the first monthly increase since September 1997, the  Federal Statistics Office said. Many economists had expected a second consecutive monthly gain in May, as the pace of economic growth picks up stream.

Meanwhile, prices charged by German retailers barely budged in June,  separate reports from four German states showed Thursday. Bond prices rose on expectations subdued inflation in Europe's biggest economy will prompt the European Central Bank to leave rates unchanged for months to come, economists said. Mr. Tietmeyer also reiterated his belief that the single European currency  had potential to appreciate, but that it was now up to the politicians in  Europe to bolster the euro and put their economies back on track by getting national budgets in order.

Mr. Tietmeyer stopped short of fully endorsing the savings package of 30 billion Deutsche marks ($16 billion) of Finance Minister Hans Eichel,  approved by the cabinet Wednesday, but said the approach was right.

''One has to wait and see how the implementation pans out before passing a final judgment on it, but the reform steps - as they have been presented -are pointing in the right direction,'' Mr. Tietmeyer said, adding that the ''clearing of the horizon'' was key for future economic development. ''Investors above all need to have planning security,'' Mr. Tietmeyer said.  ''That's why we welcome the government's first step to provide that security.''

Speaking about the current situation in the financial markets, Mr. Tietmeyer appeared to be saying that markets would have no problems digesting a possible interest rate increase in the United States.

European fund managers are increasing their exposure to  Japanese equities, betting the first-quarter economic recovery there was no  fluke.  A monthly poll of Continental Europe-based global fund managers released  by Reuters on Thursday showed average allocations to Japanese shares  rose to 11.3 percent from 10.0 percent in May. Bond allocations to Japan  rose only slightly.

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The dollar slipped against the yen and euro Friday on continued speculation that the Federal Reserve Board will raise interest rates more than once in coming months, thereby deflating U.S. financial asset markets. Fears that higher rates are ahead were fanned after the government  revised first-quarter gross domestic product figures higher. If faster economic growth pushes the Fed into a series of rate increases to keep inflation in check, that could hurt U.S. stocks and bonds and persuade investors to move funds overseas.

The dollar edged down to 121.480 yen in 4 P.M. trading from 121.88 yen Thursday, while the euro rose to $1.0430 from $1.0414. The dollar slipped to 1.5323 Swiss francs from 1.5363, while the pound fell to $1.5868 from $1.5885.

The policymakers at the Federal Reserve are to meet Tuesday and Wednesday to discuss the strength of the U.S. economy and decide whether to raise interest rates to temper growth and moderate inflation.

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The dollar rose for a second day against the euro on signs the U.S. economy is growing fast  enough to prompt the Federal Reserve to raise interest rates,  making dollar deposits more lucrative than those in the euro. The Fed's two-day policy meeting begins today. All 29 of the primary dealers in Treasury securities expect the Fed to raise its 4.75 percent target overnight rate by a quarter-point tomorrow, boosting the 265 basis-point premium dollar deposits  already offer compared with euro accounts.

``There's more potential for growth in the U.S.'' than in  Europe, boosting the return for owning dollars, said Fred Tilley,  a senior foreign exchange trader at Thomas Cook. ``I'm very much  in the (euro) bear camp. I would expect an assault on the lows'' that the euro saw earlier this month, he said.

The dollar rose versus the European Union's common currency, pushing the euro down to $1.0348 from $1.0375. The dollar was at 121.40 yen, little changed from 121.22 yen and near its lowest level in a week as concern that Japanese officials may intervene  again in the currency market, selling yen, made traders reluctant to place dollar-yen bets. Traders will get added insight into the pace of U.S.  expansion from reports on consumer confidence and new home sales  slated for release later today.

The German government said it isn't concerned about the value of the euro against the U.S.dollar and thinks Europe's single currency has potential to rise as economies in the 11-nation euro zone begin to pick up, a parliamentary statement said. ``The government sees no reason for excessive concern about the current euro exchange rate, all the more so as the European Central Bank hasn't, up to now, seen any risks to future price stability,'' the government said.

``Historically low interest rates in the euro zone will not only benefit economic growth but will also encourage trust in the new currency in the financial markets,'' the statement said.``Over the long term, the euro could become a global transaction,  investment and reserve currency.''

The euro's recent weakness in foreign exchange markets is due to ``unexpectedly strong economic growth in the U.S. and weak  growth in the largest nations in the euro zone,'' the statement  said, adding that ``uncertainty in the markets because of the Kosovo conflict also led to a stronger U.S. dollar.''

The government's statement is similar to remarks made by ECB officials about the euro's value over the course of the past month. The ECB sets monetary policy for the 11 countries, including Germany, which established the euro as their common currency at the beginning of this year.

The BRITISH POUND fell for a second day on expectations the U.S. Federal Reserve will raise interest rates, boosting returns on dollar money-market investments at the expense of sterling  accounts. The Fed meets today and tomorrow to set interest rates. A quarter-point increase in the U.S. benchmark rate would put U.S. and U.K. central bank rates at the same level for the first time since late 1987.

Leaders from the European Union signed a declaration Tuesday with Latin American and Caribbean leaders that is aimed at setting the two regions on a path of trade liberalization, political dialogue and cultural cooperation.  The nine-page document calls for a ''strategic partnership'' based on  ''political dialogue'' and ''balanced liberalization of trade and capital flows.''

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 The dollar fell against the euro Wednesday after the Federal Reserve Board suggested it did not need to raise interest rates any more, capping returns on U.S. deposits.

Traders sold dollars for euros after the Fed raised its target for overnight  loans between banks to 5 percent from 4.75 percent. U.S. three-month dollar deposits already yield about 2.71 percentage points more than those  in the euro, and that spread is not likely to widen more if the Fed does not raise rates again.

In 4 P.M. trading, the euro rose to $1.0347 from $1.0328 on Tuesday. The dollar edged up to 121.23 yen from 121.03 yen and slipped to 1.5502   Swiss francs from 1.5510 francs. The pound rose to $1.5773 from  $1.5728

''I don't think a 50-basis-point increase would have been better for the dollar,'' said Jeremy Fand, a currency strategist at BankBoston. ''The Fed  did the best it could possibly do. This is massively bullish for U.S. assets.''  The Fed signaled it would wait for evidence inflation is accelerating before increasing borrowing costs again. That lifted U.S. stocks and bonds, and  fueled demand for the dollars needed to buy them, which limited the dollar's slide.

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U.S. companies hired more workers than expected in June and gains in average hourly earnings topped expectations, even as the  official unemployment rate rose to 4.3 percent from a 29-year low of 4.2  percent in May, government data released Friday showed. Average hourly earnings were also stronger than forecast.

The dollar was little changed Friday as a government jobs report did not alter the expectations of traders that a strong U.S. economy could push the Federal Reserve Board to raise interest rates again in coming months.

''You're still on alert'' for further rate increases, said Karl Halligan, chief  trader at CIC Bank. If further reports underscore the strength of the economy, ''there's most definitely going to be another hike,'' on top of the quarter-point boost by the Fed on Wednesday to overnight lending rates.

On Friday in New York, the euro rose to $1.0248, after $1.0229 at the end of the day Thursday. The dollar ended at 120.97 yen, up from 120.77  yen.   The dollar rose about 1.8 percent against the euro this week.

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The Bank of Japan will probably step in to limit the yen's gains against the dollar and euro this week if a report out Monday from the central bank shows improved confidence in the world's No. 2 economy.   The BOJ's quarterly ``tankan'' survey of business managers is expected to indicate rising enthusiasm concerning Japan's  economic prospects. That would boost the yen by sparking demand  for Japanese equities. The BOJ has been battling a strengthening yen, which would slow the nation's rebound by hurting exports.

If the tankan demonstrates a rosier outlook, ``my sense is  you'll start to see some intervention supporting the euro''  against the yen, said Kathleen Stephansen, a senior economist at  Donaldson, Lufkin & Jenrette. That would also boost the dollar against the Japanese currency.

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The dollar rose against the yen Monday as Japan sold yen to prevent a stronger currency from hampering any economic recovery. The intervention was the fifth time the Ministry of Finance has instructed the Bank of Japan to steer the Japanese currency's value lower since June 10. The central bank bought $3 billion to $5 billion Monday, traders estimated, and purchased more than $20 billion worth of dollars and euros in June.

In London trading, the dollar was at 122.30 yen, up from 120.97 yen Friday in New York. U.S. markets were closed for Independence Day. Traders said that without intervention, the yen could rise as overseas investors buy Japanese stocks on hopes the economy is pulling out of recession. The Bank of Japan's tankan survey released Monday buoyed that optimism, showing confidence among manufacturers at its highest in a year.

The euro fell to $1.0232 from $1.0248.

Crude oil rose above $18 a barrel in London on Monday for the first time in 18 months on signs that OPEC, which satisfies about a third of the world's demand, is cutting output as promised to end a glut. Oil prices have surged 12 percent in the past month as exporters cut output to meet smaller quotas, adopted in March, reducing supplies in the United States, the world's largest oil-consuming nation.
A survey showed that the Organization of Petroleum Exporting Countries made 94 percent of its promised output reductions, up from 91 percent in May. ''Compliance above 90 percent is good news for the producers who want higher prices, and that's exactly what they are getting now,'' said Tony Machacek, a broker with Prudential Bache Futures Ltd.

Brent crude oil for August delivery rose 52 cents, or 2.9 percent, to $18.18 a barrel on the International Petroleum Exchange in London, its highest closing price since Dec. 5, 1997. Crude oil markets on the New York Mercantile Exchange were closed Monday for Independence Day, and London crude oil trading also was halted early because of the U.S. holiday.

OPEC is working with four other oil-exporting nations to trim world supplies by about 5.3 million barrels a day, or about 7 percent, to reduce a glut that pushed prices to 12-year lows in December.

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The number of Germans out of work rose for a third consecutive month in June and business confidence declined, the government disclosed Tuesday. Unemployment grew by a seasonally adjusted 15,000 from May, to 4,123,000, data from the Federal Labor Office showed. Analysts had forecast an increase of 10,000. The unemployment rate, based on unadjusted data, fell to 10.1 percent from 10.2 percent in May.

A survey by the European Commission, meanwhile, showed that German executives were more pessimistic in June than they were in May, while executives elsewhere in the 11 nations that make up the European Monetary Union were more optimistic. German companies are facing higher wages, and the government has closed corporate tax loopholes. In a separate report, the commission said the average jobless rate in that 11-nation euro zone was unchanged in May at 10.3 percent.

Some economists say Germany's economic growth should improve in the second half of the year. But the president of the Federal Labor Office, Bernhard Jagoda, said Tuesday there was still no sign of that the modest economic upturn was having any impact on the jobs market. He added that he expected unemployment in July to increase slightly from June. ''As for July, as long as we continue to follow the statistical trend that has always existed in July compared to June, we will have a slight increase in joblessness,'' he said. ''I don't think this time there will be an exception.'' On an unadjusted basis, the number of Germans out of work fell to 3,938,000 in June from 3,998,000.

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The dollar rose against the yen Wednesday on speculation Japan would sell its own currency for a sixth time if foreign investors buying yen and Japanese stocks pushed it too high. Japan's central bank sold yen worth as much as $5 billion on Monday, adding to the $20 billion sold in four rounds of intervention during June. Japanese officials are concerned a strong currency could halt the nation's fragile economic recovery by making its exports too expensive. ''The Bank of Japan is standing against a rally in the yen,'' said Craig Larimer, a currency strategist at Banc One Capital Markets in Chicago. ''It's trying to offset the effect of equity managers moving into Japanese stocks.'' In 4 P.M. trading, the dollar rose to 122.22 yen from 122.05 yen Tuesday.

The dollar also rose against the euro amid rumors that the Greens in Germany were threatening to pull out of the coalition government with Chancellor Gerhard Schroeder's Social Democratic Party. The euro fell to $1.0220 from $1.0238.

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The yen rose against the dollar Friday amid optimism that Japan's improving economic outlook will keep foreign investors buying Japanese stocks. ''The market is testing the resolve of the Bank of Japan,'' said Alex Ignarra, a trader at Generale Bank. The central bank has been selling yen to prevent the demand for equities from driving the currency higher. At 4 P.M. in New York, the dollar was at 122.50 yen, compared with 122.58 yen late Thursday.

The euro slipped as the dollar gained ground across the board against European currencies. The euro was at $1.0182, compared with $1.0218 late Thursday. Analysts said the market's obsession with driving the euro to parity with the dollar and investors' hunger for U.S. assets was undermining the single currency.

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The euro fell to a record against the dollar, approaching $1.00, as an unexpected drop in German industrial production fueled doubts the euro region will soon improve on the first-quarter's 0.5 percent growth rate. Traders also sold the euro on speculation the Central Bank won't step in to stem the currency's 13 decline since it was introduced. They're buying dollars, meantime, on expectations reports this week will highlight robust U.S. economy, boosting demand for U.S. stocks.

"The industrial output numbers out of Germany were taken to be further evidence of disappointing economic activity in Europe,'' said Adrian Cunningham, who helps oversee 10 pounds ($16 billion) at Scottish Mutual Portfolio Managers in Glasgow. ``It's understandable that the market's nervous the euro,'' given the lack of ECB support, he said.

The euro fell as low as $1.0112 from $1.0185 late Friday,  extending its drop since it was introduced in January to more than 13 percent. The dollar was little changed against the yen, at 122.05 yen from 122.35 yen.

The euro could soon fall to below $1.00, said Cunningham, who added that he expects European growth to pick up and the euro to recover in the second half of this year. Still, ``before we really adopt an aggressive pro-euro stance in our portfolio we want to see evidence'' of economic recovery, he said.

Diverging economic developments

A report today showed that industrial production unexpectedly fell 0.2 percent in May in Germany, the euro region's largest economy. Economists surveyed by Bloomberg News  forecast a gain of 0.5 percent. That followed figures indicating prices paid by German consumers barely budged in June, reinforcing expectations that the European Central Bank won't soon lift its benchmark interest rate from 2.5 percent.

Meantime, U.S. producer and consumer prices reports due this week are expected to show inflation remains at bay in the world's largest economy, while figures on retail sales are seen showing that consumer demand remains buoyant. Evidence the U.S. economy is growing while inflation stays dormant typically lures investors to U.S. financial assets and  the dollars needed to pay for them. The dollar was little changed against the yen as a rising Japanese stock market lured international investors to Japan's currency.

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The German trade surplus fell in May to DM6.67bn ($3.47bn) from a revised DM11.4bn in April, according to the federal statistics office. April's figure was adjusted from a preliminary DM11.3bn. Germany's current account deficit at the end of May reached DM7.1bn after a surplus in April of DM5.3bn, which was revised from an initial DM5.6bn.

The euro-zone's industrial producer prices fell in May by 1.4 per cent compared with the same period of the previous year, according to Eurostat, the European Union's statistical office. They were down by 1.2 per cent  year-on-year in the European Union as a whole.

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From the transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB, and Christian Noyer, Vice-President of the ECB:

Question: With your comments on inflation, and in the Monthly Bulletin as well, about the importance of monitoring inflation. Would you say that the ECB is moving to a tightening bias for interest rates? And the second question is: Did the Council today discuss investor confidence in the euro and what conclusions did you reach in your discussion?

Duisenberg: What I have said is that we do not see price stability as being threatened at present. But, if money and credit growth increases further, a re-assessment may be appropriate. You could interpret that, not as a bias, but as a bias gradually creeping into our considerations. We did not explicitly discuss investors' confidence in the euro, but we did, very explicitly, discuss the development of the euro, which includes, of course, an assessment of investors' confidence. As our answer, we expressed our strong belief that the success of our policy to maintain price stability would, over time, underline and underscore the inherent strength of the euro.

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The euro slipped against the dollar Thursday, erasing earlier gains as traders focused on Europe's slow growth, betting that the single currency would soon reach parity with the dollar. Traders brushed aside upbeat comments from Wim Duisenberg, who said he was optimistic about  the region's growth  prospects and hinted the bank would raise interest rates if growth improves. In late trading, the euro fell to $1.0195 from $1.0205 Wednesday. In Frankfurt, Mr. Duisenberg said the euro had a ''clear potential'' to strengthen and the central bank saw ''evidence'' of European growth picking up.
The dollar edged up to 121.03 yen from 120.67 yen as concern that the Bank of Japan may intervene again to weaken its currency offset optimism about economic recovery in Japan.

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The euro bounded higher shortly after noon on Monday as dealers who had expected to see more euro selling were caught short and scrambled to buy back the euro, traders said. ``People were short after the Hax comments over the weekend and now there is a squeeze, stops are being triggered that is all it is,'' a dealer at a U.S. investment bank said.

The euro surged half a cent and quickly extended gains to more than a full cent when it reached $1.0336, its highest level since early this month. The pair had started the week on a soft note, opening New York trading at $1.0139/43, far off Friday's closing level of $1.0199/02 after Herbert Hax, a key economist advisor to the German government, said the euro could fall below $1.00 soon.

While most dealers attributed the buying to a sharp short squeeze, the unexpected move also triggered speculation that central
banks may have been involved. ``Our traders said the price action looks like it could have been intervention even though we have not seen anything,'' Barclays Capital senior economist Henry Willmore said.

Germany's central bank declined to comment on talk that it had possibly been bidding the euro higher. A spokesman at the

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Hardly anybody had a good word for the euro a few days ago. Europe's uneven recovery looked uninspiring compared with the    robust health of the U.S. economy, and analysts were feverishly predicting the single currency would fall below the psychologically important level of $1. What a difference a week makes in currency trading.

The euro rose for the fourth straight day Wednesday, sparked by fresh signs of strength in the German economy.

In contrast to the recent gloom, many analysts and investors now say they believe that the beleaguered currency may have turned the corner decisively after seven months of persistent weakness. ''Something has changed,'' said Allison Cottrell, senior international economist at PaineWebber. ''What has changed is that people are now  giving the benefit of the doubt to Germany picking up, whereas before they  gave the benefit of the doubt to German weakness.''

To be sure, the euro's sudden recovery could be a chimera. The European economy failed to live up to expectations in the first half, and analysts want to see solid evidence in coming weeks that growth is accelerating in a  sustained fashion. Any hint of a rise in U.S. interest rates also could halt the euro's recovery. Nevertheless, the euro's newfound stability seems likely to cheer investors and policymakers alike by averting, at least for now, the kind of downward spiral of confidence that threatened to undermine the currency only a week ago.

 In 4 P.M. New York trading, the euro was at $1.0534, up from $1.0415 late Tuesday and comfortably above the record low level of just above $1.01 reached early last week. It was the euro's highest level against the dollar since May 25.

The recovery highlighted the extent to which expectations and sentiment drive financial markets, and just how quickly the psychology can change. At  the start of this year, the financial community was virtually unanimous in predicting that the euro would soar as the recovery of Europe gathered strength while the red-hot U.S. economy cooled down. But the trans-Atlantic economic gap failed to narrow as U.S. growth surged along at a 4 percent annual clip, about double the rate of growth in Europe.  So after rising by 1 cent on its opening day, the euro went into a steady and  prolonged decline.

 Good news arrived Tuesday with a stronger-than-expected rise in Germany's key measure of business confidence, the Ifo index, to 92.9 in     June from 90.4 in May. On Wednesday, the Bundesbank reported that  German construction orders rose 0.9 percent in May. Both indicators raised hopes that the sluggish German economy, the largest in Euroland, was poised for stronger growth.

The dollar, meanwhile, was hit Tuesday by news that the U.S. trade deficit  rose to a record $21.34 billion in May.  The deficit may not hurt the dollar in the long term because it reflects the  strength of U.S. demand relative to Europe and Japan. Indeed, analysts said the dollar could rebound against the euro if Alan Greenspan, the Federal Reserve Board chairman, signals a rise in U.S. interest rates when  he appears before Congress on Thursday. Yields  on 10-year German bonds traded at 4.61 percent on Wednesday, or 1.16  percentage point below yields on comparable U.S. bonds.

Alan Greenspan, chairman of the  US Federal Reserve, told  Congress on Thursday that central bank policy makers did  not believe that the modest rate rise in June had eliminated the threat of inflation.

However, Mr Greenspan, giving his Humphrey-Hawkins testimony, said the Federal Open Market Committee had decided, in the face of many uncertainties in the economic outlook, to adopt a   neutral bias towards future policy. He said: "It (the  FOMC) did not want to foster the impression that it was committed in short order to tighten further." Instead, it would evaluate all incoming data for signs that  further imbalances might develop, he said.

The FOMC would have to be especially alert to inflation  given the considerable strength of the economy and the  low unemployment rate, Mr Greenspan told Congress. If  that trend were to continue the Fed would act "promptly  and forcefully", he said. The Fed chairman said the committee had made the decision to tighten rates in June because it had become  clear that much of the financial strain of last year had eased and that demand in the US was growing at an  unsustainable rate. "To have refrained from doing so, in  our judgment, would have put the US economy's expansion at risk," he said.

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Italian CPI inflation for July, based on the NIC index,  including tobacco, is growing at an average of 0.3 per cent month-on-month, and 1.7 per cent year-on-year, analysts said. The figures validate the  higher-than-expected yearly trend. The European Central Bank warned that caution, not interest rate rises were needed after new figures showed that inflation was rising in Italy.

Analysts in Europe believe that short-term US interest rates are set to rise over the next few months. Some believe that the Federal Reserve may put up its funds rate by a quarter point to  5.25 per cent at its next policy  meeting on August 24. Deutsche Bank is telling clients to expect a rate of 5.5 per cent by the end of December. The dollar remained weak in Europe on the fear of further short-term declines in the value of New York equities and bonds. That concern outweighed the supportive potential from higher deposit rates in New York.

Stocks, bonds and the dollar fell for the second day in a row Friday as investors seemed convinced that U.S. interest rates will rise, a day after comments by Federal Reserve Chairman Alan Greenspan. The response was dramatic in bonds, where the Treasury's 30-year bond fell 22/32, or $6.875 on a $1,000 bond. The yield, which moves in the opposite direction of the price, jumped to 6.03 percent from 5.97 percent Thursday.The dollar ended a week of tumultuous trading down nearly 4 percent against Europe's single currency and down 3.6 percent against the yen as investors expressed new hope that a gap in global growth rates may soon narrow. At the close, the dollar stood at 1.0498 dollars per euro, up a touch from Thursday's close of 1.0512 dollars per euro. The dollar slipped to 116.60 yen from 116.62 Thursday.In the commodities markets, gold fell. Oil ended above $20 a barrel.

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Bundesbank President-designate Ernst Welteke said the euro shouldn't become too strong  because that would hurt the competitiveness of exports from the 11 nations that share the currency. ``We don't want the euro's external value to become too  strong as that would weaken our exports again,'' Welteke said in an interview with German daily Hamburger Abendblatt. Welteke will take over from Bundesbank President Hans Tietmeyer at the end of August and also become a member of the ECB's 17-member Governing Council.

He said he's not sure if the euro's rebound during the past  two weeks is ``a breakthrough'' after the single currency lost as much as 13 percent of its value against the dollar this year.  There are signs, however, that the euro region economy is improving, helping the euro, he said.

The euro gave back early gains after Welteke's comments, falling as low as $1.0617 from $1.0703 in earlier trading. The euro, which reached a two-month high yesterday, was recently quoted at $1.0659. Welteke suggested that recent comments by ECB rate setters  indicating that concern about inflation was rising shouldn't be understood as a signal that the 11-nation central bank is  preparing to raise interest rates.

The ECB had shown ``composure'' in setting rates so far, Welteke said. Recent comments by ECB President Wim Duisenberg that ``a bias'' for higher rates was gradually developing was ``a  timely signal'' that the ECB was vigilant regarding inflationary dangers.

A further consolidation of public finances is also possible in Europe, he said. The German government's plan to save 30  billion deutsche marks ($16.3 billion) in next year's budget was  feasible. ``The public awareness that changes are needed is  big,'' he said.  (Hamburger Abendblatt 7/27 or www.abendblatt.de)

The euro traded as high as $1.0703 today, though its gains were pared after Bundesbank president-designate Ernst Welteke  indicated he doesn't want the euro to extend its two-week advance. The German central bank doesn't want the euro ``to  become too strong, as that would weaken our exports,'' he said. ``He doesn't want to see excessive foreign exchange  movements within a short period of time,'' said Mark Bolton, head of trading at Bank Brussels Lambert in London. Weltke's comments are designed ``to calm the market down a little bit,'' Bolton  said. The euro may fall as low as $1.0550 in coming days, he said, though he also sees potential for gains to $1.10 in the next three months.

The dollar fell to almost a five-month low against the yen and held near its weakest in two months against the euro as signs of stronger growth in Europe and Asia attracted investment away from the U.S.``There's a flight out of dollars across the board,'' said  John Cholakis, a trader at Dai-Ichi Kangyo Bank. ``We're seeing a lot of fund managers taking money out of the U.S. and putting it into the Europe and Asia.''

The dollar fell to 116.37 yen from 116.85 late yesterday. It dropped to 115.50 early yesterday, its lowest since Feb. 11. The euro was little changed at $1.0634, after yesterday rising to $1.0724, the highest since May 14. Some investors have been cutting back on U.S. financial assets amid concern the Federal Reserve may raise interest rates again, eroding the value of bonds and raising corporate borrowing costs. European and Asian markets, meantime, offer cheaper asset prices and an opportunity to get in on the ground-floor of  economic rebound.

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The ECB left its full set of interest  rates unchanged today before breaking for a four-week summer  vacation.  A decision to stick to a fixed, rather than variable, tender also came as no surprise.   Central bank officials, including Chief Economist Otmar  Issing, said a variable rate tender would be a more efficient way of lending money. A fixed rate encourages oversized bids from banks that want to be sure to get the financing they need. That  can hand an advantage to larger banks which have less trouble putting up the collateral needed. It can also give the central bank a distorted view of the demand for money.

The ECB, however, probably didn't want to lose control over  borrowing costs at a time when economic recovery is fragile in  Germany, the biggest economy among those that share the euro. ``Loss of control over rates would be particularly  unfortunate over a summer break without an ECB council meeting,''  said Holger Schmieding, an economist at Merrill Lynch Bank AG.

The following is a comment  by Holger Schmieding, an economist at Merrill Lynch Bank AG in  Frankfurt, on the outlook for an interest-rate rise by the  European Central Bank and the chances of a switch to a variable- rate refinancing tender. ``We expect ECB to have a thorough review of its rate stance  at Aug. 26 and subsequent meetings. Ahead of Aug. 26 the ECB  staff will probably prepare a thorough review of the economic and inflation outlook. The staff may also look into the variable  versus fixed repo issue as well as how to deal with a likely  surge in cash demand ahead of the year 2000.

The ECB is probably open-minded still about the likely  outcome of that review; that means a rate hike or a variable repo is not ruled out in September or October. If the euro remains on a modest uptrend, as we expect, the best bet remains that the ECB will decide to maintain the 2.5 percent repo well into 2000.   As the Y2K probably excludes any rate move from late October  on until February 2000, the meetings on Aug. 26, Sep. 9, Sept. 23  and Oct. 7 are key.''

 The following is a comment by Thomas Hueck, an economist at HypoVereinsbank in Munich`The ECB's decision to leave interest rates unchanged is   not at all surprising. There was no need for the central bank to act right now. During the past two weeks its position has become  more comfortable, because the euro is more stable now and we have seen a series of positive economic reports. But markets do expect the ECB to act on interest rates in the medium-term.''``It would be favorable if the ECB switched to a variable rate tender in its weekly refinancing auctions in the late fall.  The bank could then allocate funds at a higher interest rate and  make it look like it was a decision by the markets.'' ``I don't want to comment much on the recent rise in the euro. But the euro was under-priced previously. The currency  could fall again soon, though in the medium-term its value will gain against that of the dollar as economic growth gaps between the U.S. and the euro zone narrow, and amid high price stability in the currency zone.''

Euro money-market rates rose  after a report showed French manufacturing confidence climbed to  the highest level in 10 months, suggesting growth is set to quicken, and sparking concern about rate increases in the euro-zone.``French business confidence was amazingly strong in July,''  said Padhraic Garvey, a senior bond strategist at ABN Amro bank. The report ``puts more pressure on euro rates.''

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The dollar fell to a five-month low against the yen Friday on  expectations that international investors will buy the Japanese currency to   invest in equities there.   In late trading, the dollar was at 114.52 yen, down from 115.45 yen Thursday  and its lowest since Feb. 15.  The dollar lost more than 2 percent against the yen during the week, and dealers became more nervous about the chance of Japanese central bank intervention, especially after Japanese officials said Thursday that they were keeping a close eye on the markets.

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The euro might not have had much of an impact on the  American public but for US companies the single  currency is very much in favour. From household names,  such as Philip Morris, Sara Lee and McDonald's, to less  known middle-sized US corporates, American borrowers  have been taking advantage of low interest rates in the euro-zone to raise capital. So far this year, US companies have issued E14.2bn ($15.2bn) of bonds in  the single currency, compared with just E10.5bn in the "legacy" European currencies for the whole of 1998, according to Capital Data, the bond information provider.

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 Strong service-sector surveys for Germany and Italy plus a   rebound in French consumer confidence provided fresh evidence   Wednesday that the euro zone's big three economies were back in tandem   after months of divergence. The service-sector polls, which followed robust manufacturing surveys released Monday, showed that Germany and Italy were improving at a faster pace as last year's crisis in emerging economies receded.

Economists said signs increasingly pointed to a sustained period of stronger growth for the 11 euro economies and subdued inflation. The positive economic outlook gave a strong boost to the euro Wednesday. In late  trading, the single currency was at $1.0769, compared with $1.0683 Tuesday.

''We are having exactly the recovery that economists and the European Central Bank have been expecting to materialize,'' said Julian Callow of Dresdner Kleinwort Benson in London. The German services index rose to a seasonally adjusted 55.88 in July, its highest level in almost a year, from 54.87 in June as more companies said they had expanded capacity to meet growing demand.

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The increase in American workers' productivity  slowed significantly this spring while a key gauge of wage pressures jumped  sharply, the Labor Department reported Thursday. Analysts said the reports suggested that the U.S. economy might be  growing fast enough to prompt the Federal Reserve Board to raise interest rates soon to stem inflation.

Productivity, defined as the amount of output for each hour of work, increased at an annual rate of just 1.3 percent in the April-June quarter, far below the 3.6 percent rate of growth in the first three months of the year. Meanwhile, unit labor costs, considered a key measure of wage pressures, rose at an annual rate of 3.8 percent in the second quarter, the strongest showing for this measurement since the end of 1997. The jump in unit labor  costs far exceeded analysts' expectations.

The dollar was little changed against the yen and the euro Thursday despite a report signaled that U.S. productivity may not be  gaining enough to curb labor costs and keep interest rates from rising.  In 4 P.M. trading, the dollar was at 114.41 yen, up from 114.22 yen  Wednesday, while the euro slipped to $1.0757 from $1.0774. The dollar was trading at 1.4877 Swiss francs, down from 1.4881 francs, and the pound fell to $1.6145 from $1.6209

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The dollar rose against the yen Friday amid weakness in  U.S. stocks and bonds after a stronger-than-expected July jobs report  sparked speculation the Federal Reserve Board would raise lending rates  soon.  In 4 P.M. trading, the dollar rose to 114.97 yen from 114.41 yen late Thursday. Traders said there was still concern that the strong yen would  hurt Japan's fledgling economic recovery and force export-oriented  Japanese companies to revise downward their earnings forecasts for the  current financial year.

 In Japan, Zembei Mizoguchi, director-general of the Finance Ministry's  international bureau, said Tokyo ''will take proper action'' to stem the rise in  the yen if necessary.   The Bank of Japan sold almost $30 billion of yen between June 10 and July 21 to stem the yen's strength.

 The euro edged down to $1.0754 from $1.0757. Meanwhile, the dollar was also trading at 1.4888 Swiss francs, up from 1.4877 francs, while the  pound fell to $1.6100 from $1.6145.

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Bond prices fell Monday as dealers sold government  paper before the $37 billion quarterly Treasury refunding this week. The  credit market was also pressured by wide expectations of an increase in the federal funds rate later this month.  ''The mood is gloomy,'' said John Poole, head of fixed income at Mellon Private Asset Management in Boston.

The benchmark 30-year Treasury bond fell 22/32 to 86 25/32. The yield  rose to 6.23 percent - the highest level since Nov. 4, 1997 - from 6.17  percent Friday.  The Treasury will auction $15 billion of five-year notes and $12 billion of 10-year notes Wednesday, and $10 billion of 30-year bonds Thursday.  Stocks, meanwhile, fell as rising bond yields and political uncertainty in  Russia kept a lid on trading.

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The dollar rose against the euro Monday after President Boris Yeltsin of Russia dismissed Prime Minister Sergei Stepashin and his government, increasing the allure of the U.S. currency as a haven.  Traders sold the euro because of the close commercial ties between Russia and euro nations. The single currency is vulnerable to Russian woes because  Germany is the largest trade partner of and lender to Russia. The dollar also got a boost after Treasury Secretary Lawrence Summers said in a speech that the United States favored a strong dollar. But some traders hesitated to bet the dollar would gain markedly from the events in Russia.

 ''On balance, we do not see the events in Russia having a major long-term  impact on the euro,'' said Ryan Shea, economist at First Chicago in London. ''There is no fundamental economic reason.''  In 4 P.M. trading, the euro was at $1.0718, down from $1.0754 on Friday.

Euro money-market rates fell as a report said unemployment rate in the euro-11 region didn't  change in June, curtailing concern the European Central Bank will  raise interest rates soon.  ``Expectations regarding an interest rate hike by the European Central Bank have been mounting,'' said Lorenzo Codogno,  head of European rate research at Bank of America, ``This is not fully justified. It won't be the case this year'' that the ECB  raises rates.

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German exports rose a stronger-than-expected 4.6 percent  in June from a year earlier, providing fresh evidence of a recovery in  Europe's largest economy, according to data released Tuesday. The trade surplus widened to 13.6 billion Deutsche marks ($7.45 billion) from  6.7 billion DM in May, its highest level since November, the Federal Statistics  Office said. Exporters, who account for almost a third of the German economy, saw business improve as worldwide growth picked up and the 13 percent slide of the euro against the dollar in the first half of the year made their goods cheaper. Rising exports will help lift German growth to 2.5 percent next year  from around 1.5 percent in 1999, according to government predictions. Germany's current-account trade balance swung to a surplus of 5 billion DM  in June from a deficit of 7.4 billion DM in May.

Exports totaled 86.3 billion DM in June. Exports to other countries in the 11-nation euro region rose 6.7 percent from a year earlier, while exports to  countries outside the 15-nation European Union climbed 6.3 percent, their  first gain this year.  Imports rose 0.6 percent from a year earlier, to 72.7 billion DM. Imports from  outside the European Union rose 2.8 percent, while those from within the euro region fell 1.1 percent, the statistics office said.

Exports have slipped since the summer of last year as economic crises in Asia, Russia and Latin America sapped demand for German goods. Now, rising overseas orders, the decline of the euro and improving business  confidence are helping fuel a recovery.

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 The euro closed at $1.0567 on Friday Aug 13, down 1.6 percent against the dollar in the week, but up more than 3 percent in the month. The euro fell as low as $1.01 against the dollar a month ago. The dollar rose against the yen and euro Friday after a report  showed that U.S. inflation was less than expected in July, easing concern that  the Federal Reserve Board might have to raise interest rates more than once  in the next few months.  The report surprised traders and investors who had thought that the  Fed would use a series of rate increases to slow the U.S. economy.

''People really expected there to be inflation showing up,'' said Jeremy Fand,  a currency strategist at BankBoston Corp. Mr. Fand added that the dollar's  rise was also indicative of a market that had been ''overly optimistic about European and Japanese growth.''  At 4 P.M. in New York, the dollar was at 115.81 yen, up from 115.53 yen  late Thursday. The euro fell to $1.0565 from $1.0665

Federal Reserve policymakers next meet Aug. 24, and many traders expect  them to raise the interbank overnight lending rate 25 basis points, to 5.25 percent. The Fed raised rates by a quarter-point, to 5 percent, on June 30.  While one further rate increase is widely expected, the news of a smaller-than-expected rise of 0.2 percent in the producer price index lessens the likelihood of additional increases, traders said.

Danes won't go to the  polls to vote on joining the European Union's single currency before September, 2000, said Danish TV2 television, citing Prime Minister Poul Nyrup Rasmussen. In September next year, his social democrat party will meet to debate the party's position on the  euro. A referendum won't be called before then, but will be held   before the next parliamentary election in March, 2002.

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 European Central Bank Executive Committee member Tommaso Padoa-Schioppa said he expects economic growth in the region to accelerate in coming months as consumer spending picks up, while inflation will remain subdued.

In an interview with German Sunday newspaper Welt am Sonntag,  Padoa-Schioppa said inflation in the euro region is ``of no concern,'' even though the ECB is ``closely monitoring'' the impact of rising oil prices on consumer price inflation.

Paced by a recovery in Germany, growth in the euro-11 economy is expected to accelerate in the second half. A report Friday showed  German retailers reported stronger sales for a second month in June, while business confidence is seen rising.  ``The worst is over,'' Padoa-Schioppa told the newspaper. ``The latest indicators show that economic growth is gathering speed and confirm our view that this process will continue.''

While rising oil prices could put pressure on consumer price  inflation, Padoa-Schioppa said he expects inflation to remain ``significantly'' below 2 percent, the level the ECB defines as price stability. Consumer prices in the 11 euro nations rose 0.9 percent in the year to June, less than half the ECB limit, while money supply growth unexpectedly slowed in that month.

The ECB has left interest rates on hold since April 8, when the central bankers cut the European benchmark refinancing rate by half a percentage point to 2.5 percent to help spur growth. Still, analysts have said they expect the ECB to raise interest rates sometime next year as economies in the region rebound. 

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The euro weakened against major world  currencies on Tuesday, dipping briefly below the 1.05 dollar level with no fresh news from the eurozone to provide direction.

THE ECB bullettin.
The European Central Bank   said forecasts that the U.S. economy will slow as growth in the European single currency zone accelerates strengthened the euro against the dollar in July.  The euro has been boosted since mid-July after some reports ``pointed towards an economic slowdown in the U.S. and a pick-up   in the pace of economic growth in the euro area,'' the ECB said in its August monthly report.  ``In particular, gross domestic product growth estimates in the U.S. for the second quarter of 1999 showed a slowdown to 2.3  percent at an annual rate, down from 4.3 percent in the first  quarter,'' the central bank added.

The euro, which was introduced as the common currency of 11  of the 15 European Union countries on Jan. 1, rose more than 3  percent in the four weeks to mid-August after a 13 percent decline earlier this year took it closer to parity with the dollar.  The euro's rebound against the dollar was helped by a report on July 20 that showed German executives were more upbeat in June  than in any month since September. A separate report that  factories in France, Europe's second-largest economy, boosted production in May also lifted the currency.  Economists expect German July business confidence, to be released Thursday, to rise even higher.

The ECB also said that the exchange rate divergence or volatility between the euro and the Japanese yen diminished in June and July, as the Japanese slump that slowed global trade   since last autumn is seen coming to an end. Exchange rate gaps between the euro and the yen have ``fallen significantly over the past two months, possibly  reflecting market expectations that the economic downturn in  Japan may be bottoming out,'' the ECB said.

Optimism about a recovery in the world's second-largest economy has been fueled by improving Japanese consumer confidence and more ample domestic demand and imports, the ECB said. The value of the euro has been relatively stable against  that of the yen when comparing it with the euro's movement to the  dollar. In July the euro fell 0.7 percent against the yen, while  in the same period it gained 4.7 percent against the dollar.

Following is a comment by Alison Cottrell, an economist at PaineWebber International in  London, on the European Central Bank's monthly report for August:    ``The ECB appears to stress its not being hawkish just for  the sake of it. It has recognized - and I believe this to be an important point - that the strong credit growth of June (and possibly beyond) may itself reflect expectations of higher interest rates, as well as competition in the banking sector to offer funds.``But the ECB is not going to make a move on rates, simply because of lending data, it depends on why the lending rate is rising and what it's being used for. The ECB also recognizes that while oil prices are rising, the impact on (inflation) is being offset by increasing competition and deregulation. The ECB has  also observed that there was no significant wage pressure in the first quarter. Again this suggests that the ECB won't be making a rate move anytime soon.

``As before the report notes the growing signs of Euroland  recovery, especially business confidence. The report cites   markets should rethink Euroland's (economic) prospects as a reason for the rise in euro yields, rather than attributing this   fact to deficit fears, or euro/U.S. dollar developments.  ``Unemployment is still lagging, but one positive point emerged: the economic slowdown in late 1998 hasn't hit the jobs market in the first half of 1999 as badly as the ECB had  previously expected.``Overall, the content remains neutral. The tone is the same, and not softer, than that of the July report.''

The following is a comment by Stefan Bergheim, an economist at Merrill Lynch in Frankfurt,  on the European Central Bank's August monthly report: ``The ECB still sees a `favorable' outlook for price stability, although it maintains that `careful monitoring will be necessary.' I think higher oil prices and the euro's recent gains are temporary factors and should not lead to faster   inflation in the medium-term. '' ``The ECB sounds a bit more cautious on the real economy in  the near term. It's also cautious on the jobs market. It seems that the tightening bias is creeping out again, now that the euro  seems to have found a bottom.''

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 The dollar took a fresh beating against the yen Thursday after the release of data showing that the U.S. trade deficit rose to a record in June.  ''The dollar did not like this trade data at all,'' said John Hazelton, currency  trader at PNC Bank in Pittsburgh. Expectations of stepped-up buying of Japanese assets by foreign investors  have spurred the yen's  current rally, and the absence of intervention in the market by the Bank of Japan has accelerated its gains.

Investors also sold dollars for the European single currency Thursday, because of a stronger-than-expected index of German business confidence, which strengthened the view that growth in Europe's largest economy will accelerate this year. ''Europe and Japan are getting their act together, and that provides alternative investment opportunities,'' said Robert Blake, senior economist  at NatWest Global Financial Markets. As investors shift their portfolios, ''that's going to impact the dollar negatively.''

In 4 P.M. trading, the dollar fell to 111.47 yen from 111.91 yen, while the euro rose to $1.0641 from $1.0528.

The U.S. international trade deficit in goods and services widened to a record $24.6 billion from the previous high of $21.3 billion in May, the Commerce Department said. Economists had forecast the deficit would  narrow.''The U.S. deficit is rising so quickly that there is some concern over whether it's sustainable, and whether foreign investors will continue to willingly finance such a large and growing deficit,'' said Douglas Porter, senior economist at Nesbitt Burns, explaining the dollar's reaction to the number.

The Munich-based Ifo research institute's index of German business confidence rose to 93.6 in July from 92.9 in June, a third consecutive month of gains. Traders bought euros in the belief rising confidence will help accelerate recovery.

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Euro money-market rates fell on speculation slow inflation means the European Central Bank  won't alter its benchmark interest rate this week even if the Federal Reserve raises U.S. borrowing costs.``A rate hike is not on the cards,'' said Charlotte Kroher, an analyst at HypoVereinsbank in Munich. ``Interest rate expectations are continuously being revised downward. The ECB  will do nothing. Looking at the three-month futures contract, higher rates are not priced in the September contract.''

Euro interest rate futures contracts settling in September   reflect expectations for money market rates of 2.74 percent, down 1 basis point from Friday. That is close enough to the current three-month money-market rate of 2.69 percent to suggest  investors say rates won't change before Sept. 13 when the  contract expires. The December contract's implied rate fell for a 10th day,  declining 1 basis point to 3.20 percent. While it's still far  enough above the current money-market rate to imply investors see a rate increase by the end of the year, investors have been  scaling back these expectations. ``The December contract's implied rate should come down in  the next few weeks,'' said Kroher. The ECB's 17-member policy-making council meets on Thursday, following a four-week break.

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The European Central Bank left interest rates at record lows on signs that quickening economic growth is having little impact on inflation.ECB officials said recently there's scant evidence that an economic revival will boost inflation, indicating that the central bank will hold its benchmark lending rate at 2.5 percent for several more months, even after the U.S. Federal Reserve Tuesday raised rates for the second time in two months.  Annual inflation in the 11 euro nations averaged 1.1 percent  in July, below the central bank's 2 percent ceiling, and figures released Wednesday showed that annual inflation in Germany, the   region's biggest economy, was at 0.8 percent in the four weeks to  the middle of August. While the cost of oil has doubled this year, other raw material prices have declined. And intensifying competition among retailers and service companies has seen prices slashed for goods such as mobile phones and Internet products.  Bank lending to companies and households in the euro region  increased at a 10.9 percent annual rate in June, accelerating from 10.5 percent in May. M3 money supply growth -- a gauge of future inflation the ECB watches -- has exceeded the central  bank's target every month this year.
 

Fifteen of 28 analysts polled by Bloomberg expect to see an increase in    the first three months of 2000. Futures contracts indicate that   investors expect the ECB to raise its benchmark rate by 50 basis   points to 3.0 percent in the first quarter.

The ECB's desire to keep rates low may also rule out a switch to a variable rate from the current fixed-rate method of allocating funds to banks as it could lead to higher borrowing costs in Europe. ``There is a risk that (a switch to a variable rate) would send the wrong signals,'' Issing said on the weekend. At a variable refinancing tender, commercial banks need to  say how much money they want to borrow at various rates. All bids above the cut-off rate are filled fully while bids at the cut-off rate are filled proportionately. The system was last used by the Bundesbank in January 1996. The fixed-rate system used so far this year by the ECB  encourages oversized bids, as banks know that their total orders are unlikely to be met. That throws up a problem for the ECB as it makes it difficult to gauge the real demand for money. The  fixed-rate method of allocating funds also hands an advantage to  larger banks, who have the collateral to support oversized bids.

This calming data has not persuaded every inflation watcher to stand down, however, following ECB President Wim Duisenberg's July warning that a tightening bias was creeping into policy. Some pessimists received more food for thought on Thursday when the ECB released its latest money supply data, the central bank's key indicator for monetary policy decision.
 The ECB's broad money supply growth indicator for the euro area came out slightly higher than economists' expectations. In the three-month May-July period accelerated to 5.4 percent compared to 5.3 percent in the previous period. But Some economists attributed the money supply rise partly to a basis effect: last year at the same time money supply growth was in negative territory, making current growth appear strong by comparison.

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The dollar was pulled down by sagging U.S. stocks Monday, losing ground to both the euro and the yen in listless trading.  In late New York trading, the euro was quoted at $1.0462, up slightly from 1.0459 Friday. The dollar also was quoted at 110.73 Japanese yen, down from 111.56.

The dollar's fate seems once again tied to that of American  stocks, which tumbled for a third straight session Monday on
worries that the Federal Reserve will raise interest rates again this year after two rate hikes this summer. Stock traders fretted over Fed Chairman Alan Greenspan's  comments on Friday, when he said inflation-fighters at the central bank will be monitoring the stock market more closely when setting interest rates.

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 Ernst Welteke, Tommaso  Padoa-Schioppa and Sirkka Haemaelaeinen, three of the most  week that there's no justification for higher interest rates.  Investors aren't convinced. Interest-rate futures show expectations for a half-point rate increase by the end of the year, as the pace of economic growth and inflation quicken. Bond  yields aren't far from a 15-month high, another sign investors  foresee higher rates.

 Unlike the Federal Reserve, which clearly signaled its  interest-rate increases in June and August, the ECB has in the  past failed to communicate clearly to financial markets. After  trumpeting at the start of the year that there would be no rate cuts in the ``foreseeable future,'' the ECB cut rates in April.``It's understandable if the markets don't pay too much attention to ECB officials,'' says Lukas Daalder, an economist at    Rabobank Nederland in Utrecht, the Netherlands.

Europe's economy is rebounding faster than expected. In   Germany, business confidence, manufacturing orders and exports are rising. Unemployment in France fell to a six-year low in   July. Italian retail sales posted the biggest rise of the year in June. Sooner or later, investors reckon, companies will start   pushing up prices.  Inflation has already started rising as a result of higher  oil prices -- which have doubled this year. Consumer prices in   the euro region rose at an annual rate of 1.1 percent in July, up from 0.9 percent in June and closer to the ECB's ceiling of 2 percent.

Three-month Euribor futures, a gauge of interest-rate expectations, suggest traders foresee a rise of half a point in  the ECB's benchmark rate by year-end. The December contract has   an implied yield of 3.31 percent, 60 basis points above the current three-month Euribor rate. Still, ECB policy-makers insist they're not worried about  inflation or planning to raise interest rates for months. There's ``no reason whatsoever'' for the European Central Bank to raise interest rates, says Bundesbank President Ernst  Welteke, one of the 17 officials who set rates for the 11 nations  that share the euro. It will be ``months'' before the ECB even   considers such a move, says Padoa-Schioppa, a member of the ECB's   executive board. The inflation outlook ``remains favorable even  as economic growth picks up,'' said Haemaelaeinen, another board  member.

The revival in Germany -- which makes up about one-third of  the euro-11 economy -- remains fragile. The Bundesbank said last week that the economy probably didn't grow at all in the second quarter. For the year, it's likely to expand 1.6 percent, before  quickening to 2.5 percent next year, according to government forecasts. Jobless rates in Germany and France are still near record highs at 10.5 percent and 11.2 percent respectively. Government   ministers and central bankers alike have recently appeared more  concerned about economic growth and jobs, than inflation. What central bankers may be trying to do is cool the pace of appreciation in the euro to help the economy. The euro has risen  5 percent against the dollar since July 12, when it reached a  record low of $1.0115, although the currency is still down 9  percent from its January introduction.

European Central Bank Directorate Member Tommaso Padoa-Schioppa said the ECB would refrain for the time being from switching to variable-rate refinancing tenders from the present fixed-rate system. Padoa-Schioppa, speaking to reporters at a dinner on Wednesday, said changing to variable-rate refis, in which banks bid for central bank funds at interest rates of their choice, could produce "undesirable movements in interest rates." "One could at some point decide to move to variable-rate tenders but I don't see that coming," Padoa-Schioppa said.

 In variable-rate tenders, banks bid not only for a particular amount, but also for the rate which they are prepared to pay.    A variable-rate auction has the advantage of giving the ECB a clearer picture of the state of demand in the market as well as of market expectations. And in the current environment, such a move would probably lead to a slight tightening of credit conditions in the euro area.  But ECB executive board member Tommaso Padoa-Schioppa said such a move might send the wrong signals to the markets.

He said that the euro zone's common money market showed only insignificant divergences in short-term interest rates among the area's 11 countries, but could still not be expected to find the right rate on its own. "So it's right to stick to the fixed rate for the moment." Under the present system, which the ECB has operated since the January 1 launch of the single currency, the ECB provides the money market with cash each week by inviting banks to bid for refinancing agreements at a fixed rate.

 That rate, which is the main interest rate the ECB uses for its monetary policy, has stood at 2.50 percent since April. Some market participants have speculated the ECB may switch to variable-rate tenders at some point this year. They have said such a move, effectively allowing the market to set its own interest rate for overnight money each week, could enable the ECB to preside over a gentle increase in the interest rate without panicking markets. The variable-rate method tends to nudge the rate upwards. In addition, low allocation ratios in the ECB's weekly allotment to banks of refinancing agreements have also fuelled expectations of a switch to variable-rate tenders. At present, the volume of banks' bids for ECB funds at 2.50 percent is so high that the ECB's actual allotment amounts to only about five percent of total bids each week. Analysts have said variable-rate tenders may deter banks from placing such large bids by confronting them with the risk of obtaining the cash at rates they had not bargained for. But Padoa-Schioppa said the low allocation rates were no reason to shift to a variable-rate system because they were not impeding any bank from bidding for the amount it wanted.

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The dollar bounced back late on Friday,  surging back aboves 110 yen, after a weaker-than-expected US employment report sparked a dramatic recovery on Wall Street.     The euro was being traded at 1.0602 dollars (1.0698).  Wall Street had fallen sharply during the previous trading
sessions as investors had feared that a particularly strong report might induce the inflation-conscious US Federal Reserve to raise short-term interest rates at the next meeting of its policymakers.  In the event figures showed that the US economy created 124,000  jobs in August, compared with forecasts of 215,000.    The news sent stock markets sharply higher and the interest rate  on bonds fell as investors wondered whether expectations of an interest rate hike by the US Federal Reserve when it meets on October 5 had been premature.  The data were seen by investors as evidence that US economic growth is slowing.

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The dollar may rise in  coming days as growing confidence the Federal Reserve will hold  off raising interest rates again this year is seen propelling  demand for U.S. stocks and bonds and the U.S. currency.    Stocks and bonds soared Friday, helping the dollar climb  after a weaker-than-expected jobs report allayed concerns  building in recent days that the Fed would raise rates next month  to slow the economy and keep inflation in check.

Recent reports ``in practically all'' euro countries show  that economic recovery is underway, said Bank of France Governor  Jean-Claude Trichet, one of 17 ECB officials who set interest rates. At the same time, inflation is ``under control,'' he said. Trichet's comments, together with those of other members of the ECB council such as Sirkka Haemaelaeinen, Otmar Issing and Ernst Welteke in recent days, suggest that that inflation isn't rising fast enough to prompt an interest rate increase at next  Thursday's council meeting -- or indeed for several more months.``I'm confident that Europe will see non-inflationary growth,'' Trichet said at a conference in Cernobbio, Italy.

Speaking at the same meeting, ECB President Wim Duisenberg said that the central bank wasn't concerned by the euro's decline  this year against the dollar. The European currency has lost  almost a tenth of its value since its introduction in January, raising concern that higher import prices could fuel inflation.

Annual inflation in the euro region accelerated to 1.1 percent in July from 0.9 percent in June, mainly as a result of  higher oil prices. Inflation, however, is below the ECB's 2 percent ceiling and reports next week are likely to show that annual inflation in both Germany and France was less than 1   percent in August, analysts said.

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 Europe's new tax commissioner called for steps to unify value-added tax and excise  duties, while lending his backing to a controversial proposed Europe-wide levy on interest income.  Frits Bolkestein, one of 20 nominees to the European Commission, said the existence of 25 methods for calculating VAT   in the 15-nation European Union ``clearly does pose a major  obstacle to people in business.''

Will erasing these discrepancies be possible with EU tax policy being decided by unanimous vote? Bolkestein repeated his support for a planned tax on cross-border interest income, which the U.K. has held up amid fears that it will undermine the London-based international bond market  and cost jobs at U.K.-based investment banks. EU leaders hope to ratify the proposed 20 percent tax at a meeting in Helsinki in December. It is part of a package including the abolition of dual taxation on royalty income and the repeal of so-called excessive tax breaks that governments use to lure businesses from neighboring countries. ``This is I hope going to be going forward to Helsinki as a package,'' Bolkestein said. He spoke out against harmonizing EU  income tax rates, while favoring a plan to cut VAT on labor- intensive local services in order to promote jobs.

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The International Monetary  Fund is upgrading its forecast for this year's worldwide economic  growth in its semiannual report to be published at the end of  this month, Dutch daily newspaper Het Financieele Dagblad  reported, citing a letter from Dutch Finance Minister Gerrit Zalm  to the Dutch Parliament. The IMF now sees the world economy  growing by 2.8 percent this year, compared with its May forecast of 2.3 percent, as the U.S. economy grows 3.7 percent instead of  3.0 percent, and as the Japanese economy grows 0.2 percent  instead of contracting 1.1 percent. Forecast economic growth in the 11 euro-currency countries remains unchanged at 2.1 percent  this year, though it's expected to accelerate to 2.8 percent in  2000, outpacing forecasts of 2.6 percent for the U.S. and 1  percent for Japan.

 In the second quarter of 1999, U.S. gross domestic product grew 1.8 percent, after expanding 4.3 percent in the first.

The European Central Bank (ECB) is not  expected to announce any changes in euro-zone interest rates at the regular fortnightly meeting of its policy-making governing council on Thursday, as the outlook for inflation remains favourable even while economic recovery in the single currency area is gathering pace.    Out of a total 37 economists polled by AFP and its associate  AFX, all said they expected the ECB to keep its key refinancing ("refi") steady at 2.50 percent when it meets on Thursday.
Haemaelaeinen told the investors magazine Boerse-Online last Thursday: "Even if growth does pick up, the prospects for lower inflation
in euroland remain favourable. We currently have no problems with internal price stability". That view was also shared by the Bundesbank's new president  Ernst Welteke.  A range of recent economic indicators has underlined the  positive outlook for the German economy, the biggest in the euro zone.    Only this week, the German finance ministry said that  manufacturing orders rose more sharply than expected in July
primarily as a result of strong export orders.  And German exports as a whole increased in the second quarter of  this year, making good some of the decline seen in the first quarter. In France, another major economy in the euro zone, GDP rose by  0.6 percent in the second quarater, faster than the rise of 0.4 percent seen in the first quarter.

Britain will take part in the euro if the  currency is successful, British Foreign Secretary Robin Cook said here Monday, adding that there were signs already that it was bringing new strength to the Eurozone.    "If the euro proves itself to be a success, then it will be in  Britain's interests to be part of that success," Cook said in a speech to senior Japanese figures.    "After only eight months, it is too early to reach a firm view  but already there are signs that the euro is bringing a new strength to the economies that are part of it."

Opinion polls show almost two out of three Britons are opposed  to joining the single currency, and the ruling Labour party lost
ground in June European parliamentary elections in a campaign dominated by the euro issue. The Labour government's position is support in principle for  joining the single currency, provided key economic criteria are met and a national referendum returns a positive verdict. He noted that in the first six months of the year the value of  international debt issued in euros was 100 billion euros, while only 87.1 billion euros worth of debt was issued in dollars.    "That is a complete reversal of the figures of only the previous  year," he said. "This represents not only the confidence of the markets in the  euro, but a source of investment for the long-term on which European companies can draw."

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The ECB is moving towards a tigher attitude on monetary policy at a "snail's pace", the president of the European Central Bank (ECB) said on Thursday, playing down suggestions that the bank is already discussing a variable "refi" refinancing rate.    ECB President Wim Duisenberg said on Thursday that the  tightening bias he had said was creeping into the central bank's monetary policy thinking back in July was "still creeping, but at a snail's pace".    Duisenberg's comments in July that the next move in euro-zone  interest rates would probably be upwards rather than downwards had helped bring to an end the long and seemingly unstoppable slide in the single currency since the beginning of the year.   His argument had been that since the signs of economic recovery  were increasing, the downward risks to price stability were receding while the upward risks were multiplying.  At the same time, he had also suggested that the ECB might  consider switching to a variable-rate auction for its regular refinancing ("refi") operations from the current fixed-rate system.    This would almost automatically lead to a slight tightening of  credit conditions in the euro zone.    But other ECB officials have said recently that such a switch
might send the wrong signals to the markets.

Variable-rate refis had not been discussed at the governing  council meeting this week, he insisted.    "And I did not indicate exactly when they would be," Duisenberg  said.  The issue "will undoubtedly be discussed at one of the  forthcoming meetings, but I did not give a specific timeframe for when it would be discussed. And what the results of that discussion will be, I cannot predict," he added.

Duisenberg on Thursday insisted on the need for the euro-zone governments to get their economies and finances in shape.    "The only way to prolong a non-inflationary recovery, and hence  to substantially re-absorb the still very high unemployment, is for all responsible parties to act decisively to increase flexibility in the labour, product and service markets," Duisenberg said.    He was speaking at the news conference held after the regular  fortnightly meeting of the ECB's governing council.    "This would also be the best way to allow the economy to take
full advantage from the present stance of monetary policy," Duisenberg added.

From the press conference:
Question (translation): Let me ask again: how strongly must the  money supply M3 rise before you say that the official interest    rates must rise?
President: Of course, I cannot answer that question because - and  I keep on coming back to it - we have to interpret the movements   in M3 in a totally new environment and with totally new time   series with great caution. So it would be very irresponsible if I even tried to begin to answer your question.

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The Bank of Japan and its overly-tight  monetary policy are to blame for allowing the yen to rise and threaten the fragile recovery in the Japanese economy, analysts say. Now the Bank's responsibility has sparked an esoteric debate on  the merits of unsterilised market intervention. The central bank stepped into the market on Friday to weaken the  yen, after surprisingly good growth figures for the second straight quarter raised hopes of a quick recovery here. Sterilised intervention involves the Bank eliminating the extra  internal liquidity generated by intervention, which this time involved creating yen to buy dollars. Sterilization may largely undermine the effectiveness of forex interventions.  Since in Japan the finance ministry is in charge of intervention, markets detect a strong clash between the BoJ and the Ministry of Finance.

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German Chancellor Gerhard  Schroeder's Social Democrats (SPD) suffered two stunning setbacks Sunday, losing heavily to the conservative Christian Democrats (CDU) in regional elections in Thuringia and municipal polls in North Rhine-Westphalia.

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The yen surged ever higher on Monday,  scaling new three-year high points against the dollar and hitting an all-time peak against the euro, as investors swarmed into the currency amid optimism over an incipient Japanese economic recovery.    The yen gained 2.5 percent against the dollar, soaring to 106.30  to the US unit, a level not seen since August 1996. The dollar was buying 109 yen here on Friday, and 108.19 earlier on Monday in Tokyo, but rapidly found the 108-yen mark and then the 107-yen threshold beyond it.    The euro meanwhile fell to 110.60 yen, the lowest point it has  touched against the Japanese currency since its launch in January, from 113.36 yen on Friday. It bought more than 120 yen less than a month ago.

Analysts ascribed the sharp fluctuations on investor  expectations of buoyant Japanese economic recovery, while sentiment concerning Europe remained more muted, particularly after disappointing euro-zone growth figures.  That coupled with a rout for the governing Social Democratic  Party in Germany in weekend regional elections helped push the euro lower against the dollar as well. The single European currency briefly slipped below 1.03 dollars before recovering to 1.0400 dollars.

Most of the 11 European Union  countries participating in the common currency, the euro, agreed here Saturday to reduce the so-called double circulation period in which their national currencies would be used alongside the euro when it goes into circulation on January 1, 2002.    The double circulation period earlier had been set at six  months, but many of the 11 countries decided such a lengthy period would breed confusion among consumers.  The reduced period will now be from four to eight weeks, with  discretion given to individual countries.

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Accoding to the Japan's finance minister, the world's top industrialised nations are discussing international intervention to weaken the yen and protect Japan's fragile recovery.  Kiichi Miyazawa said the issue was now being discussed by the Group of Seven nations after the yen's recent surge to a three and a half year high against the dollar and record highs against the euro.    "Discussion on joint intervention is now underway among the G7 nations," Miyazawa told a news conference. He said it was clear Japan could not act alone to hold back the surging yen, which has been driven up by the flood of new investments pouring into Japan as a slow recovery begins.

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The European Central Bank  should raise interest rates sooner rather than later to check inflation in the 11-nation currency area, a Bundesbank council member said, Sunday newspaper Welt am Sonntag reported. ``There's one general rule: if you take the foot off the gas in time you  don't have to get on the brakes as much,'' Bundesbank council member Franz-Christoph Zeitler was quoted as saying. Inflation in most euro countries is in check, though rising commodity prices were poised to increase pressures in the month ahead, Zeitler said.

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The yen surged in early trading here on  Tuesday after the Bank of Japan left its monetary policy unchanged despite intense pressure to take steps to try and help weaken the yen. The currency powered up to 104.85 to the dollar from 106.90 a  few minutes before the bank announced its decision, taken at a board meeting, and from 106.38 here late on Monday. The Japanese central bank resisted pressure for a rate cut by  holding the discount rate at a record low point of 0.5 percent. The yen also advanced against the euro, to 109.37 to the euro  from 111.18 before the meeting and 110.65 here late Monday. But the euro rose against the dollar after  stronger-than-expected German data.    The euro was being traded at 1.0428 dollars from 1.0405.    Markets were hoping for some form of monetary loosening that  would ease the yen down from the three-and-a-half-year highs touched earlier this month against the dollar. Japanese authorities fear that the strength of the yen could harm prospects for economic recovery there.

Many analysts believe that political pressure will mount on the Bank of Japan after it refused to do more to weaken the yen and spurred investors to drive the currency higher. In a rare display of its newly won independence, Japan's central  bank insisted after a board meeting Tuesday it was not responsible for controlling the often volatile currency markets.  Some analysts said the bank's governor, 74-year-old Masaru  Hayami, could be forced out. Markets, which had been primed for a new loosening of monetary policy, were stunned.

The dollar fell broadly against other currencies Tuesday, weighed down by a surprise move by the Bank of Japan, a huge U.S. trade deficit in July and improved business sentiment in Germany. By late afternoon in New York, the dollar was quoted at 104.87  yen, down sharply from 106.38 yen late Monday. The dollar was quoted at 105.42 yen in late Tokyo trading.

The dollar took another blow when the Commerce Department  reported a record trade deficit of $25.2 billion in July, reflecting a continued trend of Americans buying more goods from overseas than they sell. The U.S. trade imbalance results in foreign companies holding  more and more dollars in their accounts. That trend weakens the dollar as investors fear that those companies may be tempted to redeem their dollars for their own currencies.

The euro was quoted at $1.0485, up from $1.0383 late Monday.

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G7 meeting. Japan came to the meeting seeking a promise of coordinated  intervention by its G7 partners to help weaken the yen, but Saturday's statement made it clear Japan needed to take action itself.  European Central Bank president Wim Duisenberg told reporters  after the meeting that the question of coordinated intervention to weaken the yen was not discussed.    IMF managing director Michel Camdessus had said Thursday that  concerted intervention to weaken a currency was a weapon of last resort, but that if intervention did prove necessary because the yen rose "dangerously" high it would have to be accompanied by appropriate policy actions.  The G7 statement also reaffirmed the importance of progress in  achieving "a more balanced pattern of growth among G7 economies.

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The 15 central banks in the ESCB, in the interest of clarifying their intentions with respect to their gold holdings, make the following statement:
        "1.Gold will remain an important element of global monetary reserves.
        2.The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.
        3.The gold sales already decided will be achieved through a concerted programme of sales over the next five
          years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed
          2,000 tons.
        4.The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures
          and options over this period.
        5.This agreement will be reviewed after five years."

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Sirkka Haemaelaeinen,  European Central Bank council member, said the rally in gold  prices after European national banks said they'll limit the sale  and lending of bullion reserves may not be sustained. Prices rose 22 percent since the banks' comments on Sunday, surpassing US$300 for the first time in almost a year. Gold prices are still almost a third less than in early 1996 after some countries sold bullion in favor of interest-bearing bonds.

Gold for December delivery rose as much as US$45.20, or 15.9  percent, to US$329.00 an ounce on the Comex division of the New York Mercantile Exchange. That's the highest level since October, 1997. A close at that price would be the biggest one-day gain ever for the futures contract, according to Bloomberg records. ``I have been surprised that it has been so effective and partly I think it's maybe also some overshooting,''  Haemaelaeinen, a member of the ECB's 17-member governing council,  said at a luncheon of the European Union Chamber of Commerce in  Toronto. 

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 European Central Bank Vice President Christian Noyer said he was ``surprised'' by reactions after a statement he made to the European Parliament in   Brussels this week suggesting the ECB may have to raise interest rates soon. Analysts had taken a statement by Noyer earlier this week that the ECB ``may have to intervene in order to maintain our price stability goal'' as a suggestion that the central bank may  raise interest rates sooner than expected.  Commenting on his statement at the European parliament Monday that a preemptive increase in interest rates might be warranted, Noyer said ``this was a general statement.'' The ECB has a ``forward-looking perspective,'' he said.

The euro traded at $1.0613, up from $1.0525 yesterday, clearing $1.06 per euro for the first time since Sept.  9. 

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European Central Bank (ECB) President  Wim Duisenberg on Friday said the strengthening euro was moving in the right direction, adding that he was "satisfied" with its recent gains.  "Satisfied" that "the euro is going in the right direction,"  Duisenberg told journalists that currency launched January 1 has recovered to roughly the same level as major European currencies for most of 1997 and 1998.    At about 1345 GMT, the euro was trading in New York at 1.0734  dollars, substantially higher than its level late Thursday at 1.0690 dollars.  It had fallen as low as 1.0200 dollars in early July.  1.07 is the euro's strongest showing since August 10.

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The European Union's economy sent mixed signals, with  France reporting that consumers are in a record buying mood but with  unemployment in Germany rising and both Italy and Belgium fretting about stagnant growth prospects.   Although the EU economy is likely to grow by up to 2.8 percent next year, according to the International Monetary Fund, the signals indicated that the growth will be unevenly spread between buoyant economies like France  and slower-moving countries like Belgium. A French government index for  September measured the highest degree of consumer confidence since it  was first used 12 years ago.

In Germany, the unemployment rate has shot up in the formerly Communist  East as government job creation programs have come to an end. This was the main cause of an increase in the national unemployment rate, to 10.6 percent in September from 10.5 percent a month earlier, that left 4.13 million Germans in search of a job.   While unemployment in the former East stood at its highest level since May 1998, the number of people out of work declined in the West, which  accounts for 90 percent of the output in Europe's biggest economy. Government figures showed that unemployment rose by 15,000 in the East but declined by 9,000 in the West.

In Rome, Prime Minister Massimo D'Alema warned that Italy's economy, the most sluggish in the EU, might grow less than the 1.3 percent that the government had forecast for this year. He said that the war in Kosovo, by  hitting transport and tourism, had affected Italy more than other EU countries.  In Belgium, economists said the government might have to delay tax reform  plans because of higher-than-expected spending on social security and   health. In addition, the total bill is not in for the loss of markets and the cost  of compensating farmers as a result of the food safety crisis this summer  after dioxin was found in animal feed. Many analysts said that the  government's determination to eliminate its budget deficit in 2002 left it with little room to maneuver.

Finance Minister Dominique Strauss-Kahn of France said his country would probably achieve the fastest growth in the Group of Seven  industrialized countries next year. France's government predicts a growth   rate of up to 3 percent in 2000. Not only are consumers optimistic - with   the index reading minus six in September, up from minus eight in the last  report, in July, but an index of business confidence also rose to its highest   level in 14 months.

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A larger-than-expected jump in German manufacturing orders in August increased prospects that the European Central Bank would raise  interest rates at its meeting Thursday, analysts said. German manufacturers reported Wednesday that orders rose 5.1 percent in August, far above the expected increase of 0.4 percent, for the biggest gain  in almost a decade.

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No change in ECB monetary policy. ECB President Wim Duisenberg said Thursday that rising  money supply is a ``cause for great vigilance on the part of  monetary policy,'' adding to speculation the ECB may boost  interest rates.

In his remarks today, Duisenberg  said the central bank  shouldn't act in haste. ``We don't think that we should be overly activist and react to any news that comes in,'' he said. ``Monetary policy is  ill-suited to fine-tune cyclical developments in the short run.  However we will not hesitate to act should this be necessary to  maintain price stability in the medium term.''

From the press conference:

Question: Mr. Duisenberg, I have two questions concerning the astonishing gold  agreement you and 15 other national central banks, European central banks,  reached two weeks ago. First, will the United Kingdom and Switzerland, the main winners of this agreement, compensate the other European central banks in some  way, because the gold price rose strongly? And the second question: could this agreement be the nucleus for a central gold selling agency for euro area central banks?
Duisenberg: The answer to the second question is "no". The answer to the first question is somewhat more complicated. You have to realise that the statement by the fifteen participating central banks implied that they would limit their annual sales of gold  to an amount of approximately 400 tonnes per year and to an amount not exceeding 2,000 tonnes over the next five years. There are many plans, decided or planned by  some central banks. But the statement was intended to give some certainty, or to take   away uncertainty - let me put it that way - in the gold market for five years and then we will review it. And we will probably review it sometime ahead of the end of the five-year  period. As far as your question on compensation is concerned, I would say that that is not on the agenda, given the fact that we know precisely what the UK Government  intends to do, which are sales far below the 400 tonnes per year, and they have announced the amounts and the time schedule precisely. We know, preliminarily, what  the Swiss authorities intend to do, but I would like to emphasise that the Swiss have never announced either when they would start or when they would end. So there is no  time schedule there.
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Question: Mr. Duisenberg, I have to go back to the question about the vote, whether the decision taken today to leave the rates unchanged was taken without a vote. Because I did not exactly understand. You talked about a great harmony, but you did not say whether it was a harmony with a vote or without.
Duisenberg: But the problem - if I answer this question - is that I have to answer it every time, which I do not want to do, but - for this time - I will make an exception. There was no vote.

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The dollar rose against the euro Friday after a German  central banker said inflation was set to remain tame in the 11-nation euro bloc, suggesting that the European Central Bank should not raise interest  rates yet. The remarks, by Edgar Meister, a Bundesbank board member, overshadowed the monthly U.S. jobs and wage report, which on Friday gave mixed signals about the direction of the American economy. At the same time, the president of the Netherlands central bank, Arnout Wellink, said he saw a need for higher interest rates. The officials' remarks gave the impression of internal dissent among European policy-makers. At 4 P.M. in New York, the euro was at $1.0627, down from $1.0717 Thursday. The dollar rose to 107.54 yen from 107.35 yen.

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An accelerating pace of  lending in the 11-nation euro region is raising concern among   European Central Bank policy-makers because it could ignite  inflation, Bank of France Governor Jean-Claude Trichet said. ``The strong pace of growth in mortgage lending that we have seen in Europe and in France during the past six months has  raised certain concerns,'' Trichet said at a conference here.  Trichet is the latest ECB official to caution that inflation may quicken as the economy of the euro region rebounds.

Members of the six-member ECB executive committee are scheduled to make eight speeches in Europe this week. These speeches may prepare the public for an increase in interest rate in Nov. 4.  Investors have already begun to anticipate a rate rise. The  yield of the two-year German note, the benchmark for the euro  region and the most sensitive to changing interest rate prospects, has climbed 5 basis points to 3.92 percent since  Thursday. The yield has climbed 82 basis points since July 14. 

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The euro rose to the highest level  against the dollar for almost seven months here early on Friday after the Federal Reserve chairman Alan Greenspan warned about risk in US asset portfolios.    The euro was being traded at 1.0865 dollars from 1.0795 dollars  here late on Thursday. This was the highest value since March 24.    The dollar also fell against the yen, dipping to 105.90 yen from  106.98 yen late Thursday.

The decline of the dollar followed words of caution from  Greenspan, who noted overnight in Washington that portfolio managers might be underestimating the risk factor in their financial portfolios. Greenspan told a meeting of bankers that "portfolio risk  managers could find that they are underestimating the credit risk of individual loans based on the market value of assets and overestimating the benefits of portfolio diversification". Greenspan said that risk managers should put aside extra
resources, in reserves or capital, to cover losses which inevitably arose from time to time when investors lost confidence.  Anticipation of a stock market bubble depended on foreseeing a  fall of asset prices which had previously been judged by millions of investors, he said.The US stock market has been volatile of late because of fears  of an imminent rise in lending rates there. The euro also gained from the latest monthly bulletin from the  European Central Bank, which warned of a build up of inflationary pressures that were likely to come into play "in the immediate future." The comments reinforced a growing feeling on the markets that  the ECB will raise interest rates soon. 

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European Union Monetary Commissioner Pedro Solbes comments on the threat of short-term volatility in the currency markets. Solbes spoke to the European Parliament's monetary committee.``In the medium term or the long run, there is an expectation of the appreciation of the euro, but at the same  time a risk of volatility in the euro at the present moment.'' EU finance ministers signaled ``concern about short-term volatility and the risk of turbulence'' in the euro at their last meeting, on Oct. 8, he said during the hearing.  The concerns relate to the ``situation in the U.S. and the debate about whether America will have a hard or soft landing,'' Solbes said.

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The dollar bounced back against all the  main currencies except the yen on the European markets Friday, gaining more than a cent against the euro and sterling, its recovery fuelled by a Wall Street rally.    At 1600 GMT, the euro was buying 1.0680 dollars here from 1.0810  on Thursday evening, but the dollar slid back slightly to 105.80 yen from 105.98 yen. But while a week ago investors feared the worst in Wall Street  after a spectacular fall on the Dow Jones index, they welcomed the market's strong showing at the opening of trading Friday. Most traders however thought the euro's fall against dollar was  only temporary: the market is still expecting a tightening of monetary policy in the eurozone.

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The dollar remained firm against the euro  and fell slightly against the yen Monday in an unusually quiet market unstirred by significant economic news and following its large advance Friday. At 1540 GMT, the euro was quoted at 1.0657 dollars here from  1.0680 dollars late Friday. But the dollar did not continue its climb from Friday against  the euro. Analysts noted that Friday's ascent had been mainly on technical factors aimed at correcting the euro's recent sharp gains.

Fears of building inflationary pressure in the United States  persisted, and were largely the cause of Wall Street instability. Dealers said the euro should steadily climb toward 1.08 dollars  in the coming days. The European currency's direction will depend mostly on the figures for growth in M3, the broad money aggregate used as an indicator of medium-term inflationary trends, due on Tuesday (26) or Wednesday (27).

European Central Bank  Vice President Christian Noyer said low interest rates have stimulated money-supply growth in the euro zone, the latest sign that the ECB is pondering an increase in borrowing costs. Money expansion accelerated to a three-month average rate  of 5.6 percent in August from 5.5 percent in July. Speculation  is building that the central bank will raise its main rate from the current 2.5 percent at its next meeting on Nov. 4. Cheap credit is the main factor behind the expansion of  bank lending at an annual pace of about 10 percent since the euro's birth on Jan. 1, Noyer said. Expectations of higher rates have also fueled current borrowing, he added.

The euro-11 economies are likely to expand 2.2 percent this year, according to the European Commission. The commission said  last week it will probably raise its forecast for growth in 2000  from 2.7 percent now.  ``Ambitious'' structural reforms could raise the euro  zone's economic growth potential to 3 percent to 4 percent   without stoking inflation, Noyer said.

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Money supply growth in the 11 nations sharing the euro accelerated in September, fueling expectations the European Central Bank will raise interest rates in coming weeks. M3, the central bank's main yardstick of future inflation, grew at an annual rate of 6.1 percent last month, up from 5.7 percent in August, the bank said. ECB officials have warned that faster money supply growth will spur inflation, currently at a 1.2 percent annual rate -- up from 0.8 percent in January.

Will the ECB increase interest rate in November? By how much?

A Bloomberg News survey of 53 economists, traders and investors taken after the report's release found that 47 expect a rate increase at the central bank's next meeting on Nov. 4.  Thirty predicted an increase of half a percentage point. European Central Bank President Wim Duisenberg set the stage yesterday for an increase in the bank's 2.5 percent benchmark rate, saying higher rates would help put a lid on inflation rather than sap a rebound in the region's economies.

Investors agreed, sending bond prices higher. The benchmark German 10-year government bond rose enough to push yields down 9 basis points to 5.33 percent, the biggest drop in seven months.``Markets interpret M3 as an encouragement for the ECB to raise rates'' as early as next week, said Paul Thursby, senior portfolio manager at Baring Asset Management in London. Investors ``will welcome'' such a move, he said. Duisenberg said in Strasbourg that "raising interest rates in a  certain situation might be more akin to lifting your foot from the accelerator a little bit, rather than braking the car" altogether.

Should the ECB increase the interest rate in November?

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Euro money market rates fell  after Otmar Issing, the European Central Bank's chief economist, said faster-than-expected money-supply growth isn't enough reason  alone to prompt higher interest rates.  His remarks persuaded some traders that there are fewer ECB  interest rate rises ahead. A report yesterday showed M3 money  supply rose at an annual rate of 6.1 percent in September. The figures had prompted speculation on the importance of M3.

Issing's remarks failed to halt a rise in European bond  prices which began Wednesday on expectations that a rate hike was on the way.    Issing said the money supply figure "confirms the trend of  strong money growth."  But he stressed that inflation "is not rising at an alarming  rate," rather "the indicators are mildly sliding upward."  Only when other economic indicators make a compelling case would  the ECB raise rates, Issing was quoted as saying. Dealers said Thursday that many economists remain convinced that  the ECB governing council will lift euro zone interest rates at its meeting on November 4.

The European Union remained deadlocked over the proposed interest withholding tax, with Germany, Italy and France opposing U.K. demands for a blanket exemption for Eurobonds.  Most of the 15 EU governments favored an exemption for existing bonds, EU officials said during a meeting of tax experts. Britain has threatened to veto the proposed 20 percent  tax unless it spares future bond issues as well.

Finland, the holder of the EU's rotating presidency, is ``making every effort to get as much agreement as possible on the taxation package,'' Finnish Prime Minister Paavo Lipponen said  yesterday. ``One ought not to give in.'' Britain, home to Europe's financial hub, has allied with  Luxembourg, the EU's smallest state, in opposing the tax on the grounds it would undermine Europe's bond markets and diminish the  appeal of the 10-month-old euro.

The proposal would give each EU country the option of taxing  interest income of non-residents directly or reporting the income  to the account holder's home tax authority. It wouldn't apply to domestic savers or people living outside the EU.  Britain has served notice it will protect London's $3.3  trillion Eurobond market. Luxembourg today outlined reasons for shielding investment funds. It is the world leader in offshore  funds, with 62 percent of the total. Taxing interest income paid out through mutual funds would drive investment away from the EU and create an ``administrative nightmare'' for funds that remain, Luxembourg's banking  association warned.

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Duisenberg told the German magazine Handelsblatt that the "tendency" for the bank to raise interest rates had increased since July. Market speculation of a rate rise has grown since July, when the  ECB said inflation risks had shifted to the upside. European Central Bank President Wim Duisenberg said bank  policy-makers are more inclined to raise interest rates, cementing expectations the bank will lift rates this week.``Our inclination for higher interest rates has certainly  risen somewhat,'' since July, Duisenberg told the German business daily Handelsblatt.

The euro single currency rose here early today as dealers interpreted comments by the European Central Bank chief Wim Duisenberg as pointing to an increase of euro-zone interest rates later this week.    The ECB is due to make its latest interest rate decision public  on Thursday November 4.   The euro was being traded at 1.0573 dollars from 1.0520 dollars  here late on Friday. Euro money-market rates also rose  after Duisenberg comments.

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Finance Minister Dominique Strauss-Kahn, an emblematic figure of the French Socialist government's quest for economic respectability and a modern face, was forced to resign today (Tuesday) after evidence accumulated  that he may be part of a scandal involving concocted legal fees, and forged  and fraudulent documents. Facing the likelihood that his activities would be restricted shortly through the opening of a formal judicial investigation into accusations he received a  payment of 603,000 francs ($96,500) for nonexistent legal work, Mr. Strauss-Kahn offered up his own resignation, saving Prime Minister Lionel Jospin the task of dismissing his close friend and most intimate political ally. Mr. Jospin, virtually certain to be a presidential candidate in 2002, has sought to project himself as the antithesis of arrogance and corruption, and retaining Mr. Strauss-Kahn under the circumstance would have been in brazen defiance of his own hard-sought image.

Indeed, the finance minister had created his own unique space. In spite of a  French unemployment rate of 11.1 percent and poverty that reaches 16  percent of the population by the count of the European Union statistical agency - greater than the level of the poor in the United States, according to  the U.S. Census Bureau - Mr. Strauss-Kahn was a talker of such skill and seeming competence that he felt confident in presenting himself as reference  of the Socialist government's probity to the international investment community.

Nonetheless, the euro, the European currency that Mr. Strauss-Kahn helped inaugurate in January, barely moved on Mr. Strauss-Kahn's departure. Perhaps as a reflection of France's relatively smaller economic  role, Mr. Strauss-Kahn's exit appeared to create little concern and have much less impact internationally than the resignation in March for political reasons of his German Social Democratic counterpart, Oskar Lafontaine.

Within hours of Mr. Strauss-Kahn's resignation, the government announced  that the post of finance minister would be taken over by the secretary of  state for the budget, Christian Sautter, a career economist serving under the  finance minister whose experience in international affairs goes back to the  first years of the presidency of Francois Mitterrand, whom he assisted as an adviser. Mr. Sautter was described by an associate as standing considerably further to the left of his predecessor and having a less flexible view of economics and politics in general.

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The euro was showing no ill-effects on  Wednesday from the resignation of the French finance minister, signalling that the euro zone is standing up better to upheavals in domestic politics than did the component 11 national currencies. The yen meanwhile remained firm owing to market speculation that  a supplementary budget promised by the Japanese government could be bigger than expected. The euro was buying 1.0505 dollars from 1.0507 on Tuesday evening and the yen was going for 104.08 to the dollar from 104.12. The single European currency has barely flickered in the political gale which struck French politics on Tuesday with the resignation of Finance Minister Dominque Strauss-Kahn to defend himself against allegations of fraud before he took office. Strauss-Kahn was as formidable a heavyweight on the European scene as was former German Finance Minister Oskar Lafontaine who resigned in March. The euro, which was then weak, rallied immediately. But analysts said at the time that this was more because Lafontaine had campaigned against policy by the European Central Bank, undermining the independence of the bank, than because he was arguing for left-wing policies in Germany, although policy soon changed direction.

Analysts said that the markets have now woken up to the fact that the euro is more immune to domestic political wranglings within euro-zone member states. "Markets are now quite efficient and recognise that Strauss Kahn did not run European monetary policy," said Credit Suisse First Boston currency strategist Peter von Maydell. "One of the main aims of the Maastricht Treaty was to take the politics out of markets." Economists noted that just a few short years ago, the  scandal-tainted resignation of a French finance minister would have provoked an attack on the franc. Political convulsions habitually translated into exchange market volatility, but not any more. "Because of the euro-zone, a minister, even from a large  country, does not have much influence," added CIC analyst Ciaran O'Hagan. "It's not like the mid-1990s when the internal politics of every country was closely followed."

Others said that the impact of Strauss-Kahn's departure was  being more than offset by the expectation of a sharp rise in euro-zone interest rates on Thursday, when the European Central Bank (ECB) convenes for its twice-monthly meeting. "It's only because of the timing of events," said BankBoston  analyst Jeff Woodruff. "Everybody is waiting for the ECB meeting. If we weren't staring down the barrel of a 50-basis-point rate hike, things could have been very different after Strauss-Kahn's resignation, but the interest rate theme is dominating." With this in mind, the Strauss-Kahn factor could still return to  haunt the market if the ECB does not raise rates by the full 0.5 percentage points to three percent, currency watchers believe. "The market has priced in the ECB to raise rates by 50 basis  points, and anything less will be bad for the euro," said von Maydell. Elsewhere in the currency markets, rumours that Japan's fiscal  package could be worth as much as 15 trillion yen supported the currency in London trading. Japanese markets were closed for a holiday on Wednesday.

The International Monetary Fund said German economic growth is recovering because of the improved global outlook, low interest rates and a weak euro, which is boosting the nation's exports. The IMF said it's expecting Europe's largest economy to expand ``about 1.5 percent'' this year and 2.5 percent in 2000. That's in line with the German government's own forecast. ``Short-term prospects are favorable,'' the IMF said in its  annual economic review of the country. ``An improved external environment, easier monetary conditions and greater clarity on policy should all support short-term recovery.''

German companies have registered stronger orders for several months, while industrial production has also improved recently.  In August, manufacturers said orders rose at the fastest pace in almost a decade, boosted by demand from overseas.  Signs of accelerating growth in Germany, coupled with reports from other European countries about a pickup in economic  activity, are also making an interest rate increase by the  European Central Bank at its meeting tomorrow likely. The euro  zone's benchmark lending rate currently stands at a low of 2.5  percent.

The dollar rose against other major currencies Wednesday as stocks rallied and a pair of economic reports eased
concerns about inflation. In late New York trading, the dollar was quoted at 104.95  Japanese yen, up from 104.12 yen. The euro fell to $1.0485, down from $1.0515 late Tuesday. The dollar was bolstered by a rally on Wall Street, where the  Nasdaq composite index closed above 3,000 for the first time. Higher stock prices can increase demand for dollars as foreign investors put more money into U.S. stocks.

Also benefiting the dollar were two economic reports suggesting  that the U.S. economy may be slowing on its own, possibly lessening the likelihood that the Federal Reserve will raise interest rates at its next meeting on Nov. 16. In separate reports, the Commerce Department said factory orders  declined more than expected in September. Meanwhile, the Conference Board, a private research group, reported that the Index of Leading Economic Indicators, its monthly gauge of future economic activity, fell slightly.

BBC online. Business: The Economy Publish and be praised, ECB told, Nov. 3 1999.To publish or not to publish - the kind of decision that comes naturally to some central bankers, and not others. What to tell, and when. This is why the president of the European Central Bank, Wim Duisenberg, has recently had such difficulty squeezing out the concession that the ECB will publish internal economic forecasts - not in a rush, but sometime within the next year. The Bank has also conceded that it will eventually  publish the economic models it uses to come to its decisions - a big step towards the transparency so  beloved of economists and bond market analysts.

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Monetary decision by the ECB. The interest rate on the main refinancing operations of the Eurosystem is  raised by 0.5 percentage point to 3%, with effect from the operation to be settled on 10 November 1999. The interest rate on the marginal lending facility will be raised by 0.5 percentage point to 4%, with effect from 5 November 1999. The interest rate on the deposit facility will be raised by 0.5 percentage point to 2%, with effect from 5 November 1999. The move reversed the half-point cut that was ordered by the bank in April, when the marginal financing rate was cut by a full point to 3.5 per cent and the deposit rate by half a point to 1.5 per cent. Also the U.K. central bank increased  its repurchase rate by a quarter point to 5.5 percent, the second  increase in two months.

(November 8) The Chief Economist of the ECB Otmar Issing said, in Les Echos, that the policy council was split on whether to  raise rates 25 or 50bp when they met last Thursday. The central bank finally opted for a 50bp raise and Mr Issing noted that he was in favour of this larger move. “A smaller hike would have given the impression that we  were just taking a first step in a series of rate hikes” Issing said.

The ECB last week said euro zone money supply growth, the  bank's main gauge of future inflation, expanded at an annual rate  of 6.1 percent in September, up from 5.7 percent in August. M3  growth has exceeded the bank's 4.5 percent target every month  this year, as consumers and companies increase borrowing, taking   advantage of interest rates that are at a lower-than-average level compared with the rest of the decade.

Faster growth has persuaded several companies to raise prices. SGL Carbon AG, the world's largest maker of graphite  electrodes for steelmakers, said Wednesday that it's planning to  raise the price of its graphite electrodes in Western Europe between 4 percent and 8 percent. In Austria, Mayr-Melnhof Karton  AG, Europe's largest maker of cartonboard, raised prices by as much as 15 percent on Sept. 1.

Many analysts expect to see a further ECB interest rate  increase early in 2000, when agreements are likely to be reached on raising wages in the euro zone. Germany's largest union, IG   Metall, brokered the biggest pay raise in seven years for 3.4 million workers in the metals, car and electronics industries this year. The union said it will push for wage increases above the rate of inflation in the next year's round of talks.

The European Central  Bank's decision to raise interest rates was a ``clear mistake'' and a ``significant blow to the economic upswing'' in the 11-nation euro region, according to a pre-release of German daily Berliner Zeitung, citing the DIW Research Institute. DIW Economist Gustav Adolf Horn said the rate increase may bring German economic growth to a ``standstill'' in 2001. Horn also said a possible rise in the euro against the dollar as a result of the rate increase would hurt exports, the paper reported.

The EURO fell against the dollar and yen, touching its  lowest level in six weeks, as rising U.S. stocks and bonds drew  investors to U.S. financial assets. The euro briefly climbed earlier today after the European Central Bank raised its refinancing rate half a percentage point  to 3 percent. Those gains were limited by concern the higher benchmark rate could hinder the region's economic recovery. The euro fell for the third day in four against the dollar,  to $1.0375 from $1.0489 late yesterday in New York. It fell as  far as $1.0350, its lowest level since Sept. 20. It sank against the yen as well, to 108.800 yen from 110.005 yesterday. In trading after the ECB rate decision, the euro rose as high as $1.0540.

The Bank of England did not issue a statement explaining its  rate decision, though minutes of the meeting will be published Nov. 17. Members of the bank's Monetary Policy Committee have said they're concerned that a revival of economic growth worldwide, combined with a booming British housing market and a low unemployment rate, could push inflation above the  government's 2.5 percent target.  Seven interest rate reductions in 9 months between October 1998 and June 1999 fueled the current expansion. U.K. gross domestic product increased 0.9 percent between July and September, up from 0.6 percent in the second quarter. Retail prices rose 2.1 percent in the 12 months through September, almost twice the inflation rate in the euro region. Prices of commodities such as oil, aluminum and copper have surged in recent months, boosting manufacturing costs.

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An economic recovery in the 11-nation euro region is underway, said European Central Bank President Wim Duisenberg, a day after the bank raised interest rates for the first time.  ``The euro zone experienced a slowdown in economic growth at the beginning of this year,'' Duisenberg told the Dutch  industry group VNO-NCW. ``Fortunately, at this moment, a recovery is well underway.'' He said national governments can promote growth and lower unemployment, mainly by cutting budget deficits and introducing more flexible labor practices.  ``The national governments have the keys to let their economies perform better,'' Duisenberg said. ``Structural  reforms are the only long-lasting means of reducing unemployment, providing for the aging population, and reducing government debt.'' In the monetary union, 13.1 million people are looking for work, or 10.2 percent of the workforce, Duisenberg said. ``This amount doesn't include those who have given up looking for a job or maybe never tried,'' he said.

While not  every one is screaming bloody murder, some Germans are voicing  strong dissatisfaction with the European Central Bank's move yesterday to raise its benchmark refinancing rate by 50 basis points to 3 percent.  The most outspoken critic yet is Bundesbank council member  Klaus-Dieter Kuehbacher, who told the Berliner Morgenpost today   that ``the European economy still isn't growing so fast that one  could have to rein in monetary policy to damp growth.'' He went on to say that current inflation rate in the euro zone of 1.2 percent ``doesn't show any reason to intervene,'' presumably   meaning to raise interest rates. Kuebacher's remarks follow German Finance Minister Hans Eichel's comments on Wednesday, one day before the ECB policy  meeting. Eichel, asked if he saw any inflation risk, declared, ``In Germany I don't see any at the moment.''

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Companies from across the 11-  nation euro region brushed off the European Central Bank's half- point increase in interest rates, saying it's unlikely to slow  their sales or investment. The ECB Thursday raised its benchmark rate to 3 percent, the first increase since the euro's debut on Jan. 1. While the move may raise borrowing costs, ``a half-point is  not going to alter a company's strategy to invest or not to  invest,'' said Gianfranco Carbonato, chief executive of Prima  Industrie SpA, Europe's third-largest maker of laser equipment.  ``It's an acceptable rise, so long as it stops there.''

Faster economic growth and a doubling in oil prices this  year spurred concern among ECB officials that companies will soon start raising prices. Annual inflation in the euro region  was 1.2 percent in September, up from 0.9 percent in June and  inching closer to the bank's 2 percent ceiling. The euro region's economy is likely to expand 2.8 percent  next year, outpacing the 2.6 percent growth in the U.S., according to International Monetary Fund estimates. ``Interest rates at 3 percent seem reasonable to me,'' said  Daniel Harari, chairman and chief executive of Lectra Systemes SA, a French maker of computer software for the fashion  industry. He called Thursday's move ``logical'' given the ECB's  inflation-fighting mandate.

 Bonds rallied on the move, with the benchmark German 10- year bond yield dropping 12 basis points to 5 percent, on confidence the ECB is serious about fighting inflation. In the  past two weeks, yields have fallen 41 basis points, actually lowering borrowing costs for companies selling longer-term debt.   The euro fell after the ECB move, also good news for  exporters such as Lectra Systemes' Harari, who said his company is more sensitive to exchange rates than to interest rates. The euro's 11 percent drop this year has helped foster economic growth by making the region's goods cheaper overseas. Belgium's largest shipping company, Cie. Maritime Belge SA,  was unfazed by the ECB's decision. ``It's not a big deal for us,'' said Chairman Philippe  Saverys. ``Rates are very low historically -- and we are more concerned with the dollar than with interest rates.''

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 The Chief Economist of the ECB Otmar Issing said, in Les Echos, that the policy council was split on whether to  raise rates 25 or 50bp when they met last Thursday. The central bank finally opted for a 50bp raise and Mr Issing noted that he was in favour of this larger move. “A smaller hike would have given the impression that we  were just taking a first step in a series of rate hikes” Issing said.

European Union finance ministers agreed on Monday to shorten the transition to euro notes and coins after January 1, 2002, with the aim that most cash transactions take place in the new currency after two weeks. "Member states will make their best efforts to ensure that the bulk of cash transactions can be made in euro by the end of a fortnight from January 1, 2002," the ministers said in a statement issued at the end of a one-day meeting in Brussels. The euro was launched by 11 countries in January this year but will not fully replace national notes and coins until 2002 because of the time needed to produce and stock euro banknotes and coins. Ministers also decided to shorten to two months, from a previously agreed six months, the period during which national monies could circulate alongside euros.

Limited amounts of euro notes and coins would be made available to banks, retailers and security firms before the end of 2001 to make sure change in the new currency could be given from January 1, 2002. The public in euro zone countries could also get "limited quantities of coins" upon request, the statement said. Finance ministers have been under pressure from retailers to speed up the transition to the new currency. Shops fear they will become targets for armed robbers if they have to stock twice as much cash as normal for a long period after 2002. France has already said it will make "starter packs" of euro coins available to its citizens at the end of 2001 to help the process.The EU statement is non-binding and it will be left up to individual EU states to decide on the exact details of their transition.

A majority of European Union governments urged the U.K. to abandon its insistence on a tax exemption for Eurobonds, in a last-ditch effort to save a planned EU withholding tax. Most of the EU's 15 finance ministers said an exemption for holders of international bonds would be ``unjustified, unfair and would distort competitive conditions,'' according to a statement  at the monthly finance meeting.

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 Euro money-market rates fell as European Central Bank Vice President Christian Noyer said rates are likely to stay unchanged for the next few months.  The central banker said in an interview with Italian newspaper Il Sole he doesn't see further moves on interest rates ``in the coming months,'' lessening concern the ECB raise  borrowing costs again. It lifted its benchmark refinancing rate  50 basis points to 3 percent on Thursday. Rates on the March interest-rate futures contract fell 1  basis point to 3.49 percent. The three-month Euribor money-market  rate fell 2 basis points to 3.46 percent. The spread between  these rates is narrow enough to suggest investors don't expect rates to change before the contract expires.

German unemployment unexpectedly declined in  October, the first fall in three months. The jobless rate fell to 10.5 percent from 10.6 percent the previous month, the Bundesbank said.

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European Commission  President Romano Prodi abandoned efforts to end national vetoes   on European Union tax policies, shying away from a confrontation  with the U.K.  While calling for ``major'' reforms such as handing more   power to the commission president and the extension of majority  decision-making, Prodi said unanimity should prevail in   sensitive areas such as finances and foreign affairs.  ``I see nothing but risks and dangers in toying with the   illusion that major reform can wait,'' Prodi said.  Concerns about surrendering tax powers to EU institutions have heightened British skepticism toward the 11-nation common currency, the euro, with the U.K. threatening to wield its veto against a planned interest withholding tax.

EU leaders aim to complete an overhaul in decision-making procedures next year to prevent gridlock when the 15-nation  region expands beyond the former Iron Curtain to 25 or more countries. Eastern European members are likely to start joining  in 2003 or 2004.

 The reluctance to question the U.K.'s tax veto may make it easier for Prime Minister Tony Blair to convince the British public of the benefits of closer links to the continent. Blair was instrumental in winning the presidency for Prodi after the  old commission collapsed in a corruption scandal in March. France, in turn, may object to Prodi's call for more majority voting on trade policy. The reforms themselves require a unanimous vote. Heads of the region's 15 governments will get the process under way at a summit in Lisbon next March.

 Austria wants to pool its  government borrowing with that of the Netherlands to reduce the two countries' funding costs, said Helmut Eder, the managing director of Austria's Federal Financing Agency in Vienna. Currently, Austria has to pay investors about 25 basis  points more than neighboring Germany to borrow money for 10  years. The Netherlands is paying about 14 basis points more, while France pays a premium of about 11 basis points. Eder said that's unfair, considering all three countries share the same top investment-grade credit ratings from the  major rating companies. By pooling Austria's funding with the  Netherlands, and creating bigger, more easily traded issues than  either sells now, that extra expense could be cut, he said.

Eder said that one of the main reasons for the current width of the gap is the success of the German bund futures  contract traded on Eurex, the world's largest derivatives  exchange. That contract traded about 12 million contracts in  October, more than a third of the entire exchange's traded  volume, Eurex said. The advantage for the German government is that only their  government bonds are acceptable in settlement of the futures contract, meaning that they are the most heavily traded, and  therefore typically the biggest, debt issues in Europe.  Investors tend to favor such issues because they are usually the easiest to buy and sell and tend to offer the smallest difference between the buying and selling prices.

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Bundesbank vice president Juergen Stark  said on Thursday that German junior Finance Minister Caio Kai Koch-Weser should succeed Michel Camdessus as managing director of  the International Monetary Fund (IMF).  Stark said on German radio that "Caio Koch-Weser has an

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From the Financial Times, Friday Nov. 12, 1999. "ECB: Bank opposes short-term rate changes", By Tony Barber in Frankfurt:  Otmar Issing, ECB chief economist, yesterday seemed to distance himself from the ECB's president, Wim Duisenberg, by suggesting that the ECB might not be able to publish an inflation forecast.  In a speech in Bonn, Mr Issing said the ECB used a wide range of indicators as well as "various forecasts of the  outlook for price developments" when shaping its monetary  policy. This distinguished the ECB from other central banks which used a specific inflation forecast as centrepiece of  anti-inflationary strategies, he said.

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The Federal Reserve raised interest rates by a  quarter point today, boosting a key rate for the third time this year in an effort to slow the sizzling U.S. economy and keep inflation from becoming a problem. But policy-makers concluded that inflation risks have declined  and signaled a shift away from a bias toward raising rates in the near future. Wall Street responded positively.

The Fed said it was increasing its target for the federal funds  rate -- the interest banks charge each other on overnight loans -- to 5.50 percent from 5.25 percent. It also raised its mostly symbolic discount rate, the interest  that the Fed charges to make direct loans to banks, by a quarter point to 5 percent. In a statement explaining its decision, the Fed said, ``Although  cost pressures appear generally contained, risks to sustainable growth persist.'' Fed policy-makers said that while there had been some slowing of  economic activity, they were worried that the pace of growth ``continues in excess of the economy's growth potential.''

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The recent decline in the value of the  euro against the dollar can be explained by the strength of the US economy, the chief economist of the European Central Bank (ECB), Otmar Issing said on Thursday. "The recent development of the exchange rate of the euro was  very much affected by new information about the strength of the US economy," Issing said in a speech prepared for delivery at the German-British Chamber of Commerce in London.

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The euro slumped to its lowest level to date against the dollar and the yen Friday despite brighter news on Europe's economic prospects and efforts by central bankers to talk up the infant European currency. In European trading, the euro fell to $1.007, down from its  previous low of $1.0108 in July and a 15 percent drop from peak reached on the euro's market debut on Jan. 4. Against the yen, the euro skidded to 104.70, the latest in a series of all-time lows. In trading in New York, the euro crept back up to $1.0156, but  it seemed only matter of time before the shared European currency fell below the $1 benchmark for the first time.

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Finance ministers from the 11 countries in the euro area are not concerned about the currently low levels of the euro,  and see little risk of rising oil prices  boosting inflation, an official from one of the countries said.  The official was speaking after the 11 euro-area ministers' regular meeting with European Central Bank President Wim  Duisenberg. The euro has dropped to historic lows against the  dollar, weakened by remarks from European Central Bank officials saying they are unconcerned by its weakening and news of higher-  than-expected U.S. growth. EU policymakers have repeatedly said that the euro has a  potential for appreciation in the medium term. The euro-11 official said the euro's current level -- near  its historic low of $1.0070 reached Friday -- chiefly reflected U.S. economic expansion and a recovery in Japan. He said while financial markets' confidence in the currency could be eroded if  it carried on dropping, the region's favorable growth prospects  would prevent that from happening.  The euro region is set to expand 2.9 percent next year, according to European Commission forecasts last week.

Euro-11 ministers also discussed rising oil prices and wage  costs and the impact on inflation. Oil poses no risk to average  euro-11 inflation in the near term, he said, adding that a jump to $27 a barrel from $22 would add just 0.1 percentage points to euro-11 inflation.

Euro money-market rates fell  amid speculation the European Central Bank won't need to raise  interest rates to restrain inflation this year, or in the first quarter of the year 2000. Euro interest-rate futures contracts expiring in March  reflect expectations for three-month money-market rates of 3.58 percent, down 3 basis points from Friday. Three-month money-market rates were unchanged at 3.45 percent.  The 13 basis-point spread between these two rates is narrow  enough to suggest investors expect borrowing costs to stay on hold  for the next four months.

M3 money supply, the ECB's main  barometer of future inflation, slowed to a 6 percent rate in  October, from a revised 6.2 percent the previous month. However Duisenberg still considers M3  ``on a rising trend,'' suggesting the bank  may raise interest rates again in coming months.  ``Monetary aggregates, up to September, reinforce our view  that M3 growth is on a rising trend,'' Duisenberg told the European Parliament's monetary affairs committee.

 The European Central Bank  won't react to the euro's decline to a record low against the dollar, as the slide is unlikely to spur inflation, ECB President Wim Duisenberg said. ``The euro has demonstrated signs of weakness over the past few weeks, including today,'' Duisenberg told the European  Parliament's monetary affairs committee. ``If you ask me whether  we will take monetary action, the answer will be no.'' The euro fell to an all-time low of $1.0039 after Duisenberg's remarks, down 14 percent since its debut on Jan. 1. It last bought $1.0062. Duisenberg said the currency has the  potential to gain, and that its slide doesn't endanger price  stability.

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The euro flirted with an all-time low against the dollar Tuesday but managed to stave off for another day its widely expected slide to parity with the U.S. currency.The euro slipped as low as $1.0043 in European trading before recovering late in the day to $1.0074, an improvement over Monday's late European rate of $1.0060. The modest recovery came a day after the fledgling regional currency sank to an all-time low of $1.0039 during trading. As the trading day ended in New York, the euro was quoted at  $1.0087, slightly below Monday's late U.S. rate of $1.0095. As the euro manages to keep above $1, some European economists  are predicting that it soon would sink below that psychological barrier.

European political leaders have professed not to be concerned  about the weakening euro. French President Jacques Chirac and German Chancellor Gerhard Schroeder, meeting Tuesday in Paris, noted that the bullish outlook for growth in the European economy bodes well for a more robust euro. However, the euro also is responding to other factors, including  the net outflow of investment capital from the 11 European countries that have adopted the euro as a single currency. This outflow has lessened demand for the euro, pushing it closer  towards parity with the dollar. If it fails to rebound, however, that could trigger a loss of confidence in the euro as a hard currency.

The dollar plunged as low as 101.35 yen during trading Tuesday  in Tokyo -- its lowest level since December 1995 -- then recovered somewhat to 101.88 yen in late New York trading. That still was below Monday's late rate of 102.35 yen. This week, Japan's central bank has been buying dollars in the  open market to stop the yen's rise, but has not yet been able to cool off the yen. 

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Euro money-market rates were  little changed as the European Central Bank's council convened to set interest rates for the euro-11 region. No change is expected. And indeed  the Governing Council of the ECB did not change the ECB monetary stance.  Also the reference value for the annual growth rate of the broad monetary aggregate  M3 was kept at 4½%.

``The 50 basis-point hike in November was a mistake,'' because the European economy was not ready for such a sharp increase, said Jim Power, chief economist at Bank of Ireland in  Dublin. Still, he said, ``We expect rates to rise by 75 basis points in 2000 but it will be in the second half of the year rather than the first.''

Euro interest-rate futures contracts settling in March reflect expectations for three-month money-market rates of 3.56 percent, up 1 basis point from yesterday. The December contract  carries a rate of 3.44 percent, also up 1 basis point. The three-month rate is currently unchanged at 3.45 percent.  It's hovered at that level for 14 straight trading days. The 11 basis-point spread between these rates suggest investors don't see  interest rates changing in the next four months. Still, June futures rose 4 basis points to 3.91 percent. The gap with the three-month cash rate is enough to imply investors expect higher rates by the time this contract expires.

In the latest Bloomberg News poll of 31 analysts and  investors, none see interest rates changing before the start of the year 2000. Twelve anticipate a 25 basis-point rise in the first quarter, two see a 50 basis-point rise in the key refinancing rate. Eleven  of those surveyed see higher rates in the second quarter. One analyst expects a 25 basis point fall in rates in the third quarter, and three see a rise then or in the following 6 months. One analyst sees a switch to a variable repo rate, where investors and traders help determine the benchmark rate according  to demand.

The euro exchange rate:

Wim Duisenberg, the President of the  European Central Bank (ECB), tried to talk the euro up as the currency sank to a record low against the dollar Thursday. The euro's fall came against a background of strong gains on Wall Street which strengthened the dollar, analysts said. And the latest comments from the European Central Bank did little to support the euro. As the euro hit 1.0010 to the dollar at one point during trading  in London Thursday evening, in Frankfurt, Duisenberg was insisting that increasing growth in the euro zone would draw investors back to the currency.

Duisenberg had harsh words for the German government over its  controversial intervention last week to save the construction group Philipp Holzmann. That was bad for the image of the euro zone, he said. Berlin's decision raised concerns on capital markets that the  governments of the euro-zone countries may be dragging their feet in the much-needed structural reform of their economies. Duisenberg, speaking to reporters after the regular bi-monthly meeting of the ECB's board of governors, insisted its monetary policy would ensure long-term, inflation-free growth in the coming years. But he added: "The board of governors will remain vigilant to  any risk to price stability coming from either interior or exterior sources, and will take timely action."

Uwe Angenendt, an analyst with BHF-Bank in Frankfurt, said: "The  fall of the euro is not structural, it's to do with hitting a psychological barrier (parity). "Against that, the ECB can do nothing, unless it intervenes,  which I think is very unlikely." Analysts in London said the eagerly-awaited US employment report for November, due to be published on Friday, Nov. 3 might be the final blow to knock the euro down to parity with the dollar.

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The euro temporarily fell to $0.994, then it went back  up to $1.0023 and then dropped slightly again.

The European Commission downplayed concerns that the euro is in jeopardy after it dropped in value on international markets and in relation to the U.S. dollar Thursday. The British Broadcasting Corp. said currency experts are forecasting  a further drop in value of Europe's single currency but the commission claimed the tumbling euro will benefit European exports.

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The euro broke the symbolic one-dollar barrier for the second time,  dropping to an all-time low of 0.9990 dollars during London trading on Friday, after it hit 0.9995 in New York the day before.

Europe's single currency, the euro, which  has dipped briefly below parity with the dollar for the first time since it was launched, could drop further in the short term, analysts said. But it recovered slightly both days, ending the week at 1.00028  in New York, as economists said its long-term credibility was not in question.

Traders on both sides of the Atlantic believe it could reach 97 or 98 cents this week due to a strong US economy. Lisa Finstrom, an analyst at Salomon Smith Barney, said US  financial markets were being boosted by strong economic results which underpinned the dollar as well. In London, Commerzbank economist Nick Parsons said that while  Europe's economic figures were good, those in the US were even better, as the Dow Jones industrial index outperformed a strong showing by the CAC-40 in Paris.

But most traders expected the euro to make a comeback after  Christmas or early in 2000 at the latest as the dollar was still considered a refuge ahead of unknown consequences tied to the millennium computer bug. "Many of our clients say they want to invest in euros, but that  they will wait until the beginning of next year," one trader said.    "Many traders feel the euro is undervalued. It will stay around  98 cents for the time being and when (traders) see it has strong backing, they will take their profits and bring the dollar back to 1.04-1.05 to the euro," predicted Stephen Gallagher, an economist with Societe Generale in New York. In London, the consensus among analysts was that the currency  would in coming months trade close to the level of 1.08 dollars.

Analysts do not see current euro levels as signs of a  credibility crisis, explaining bankers' confidence even as it

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Exchange rates play a role in the European Central Bank's efforts to keep the euro stable, and the bank will consider the effect of changes in exchange rates if  they threaten the stability of the single currency, said European Central Bank Vice President Christian Noyer. ``The exchange rate is an important variable for the Eurosystem, as it is one of the determinants of the outlook for price stability,'' Noyer, a member of the ECB's 17-member  Governing Council, said in a speech on the euro at the London  School of Economics. ``If exchange rate developments pose a threat to price stability in the euro area, this threat will be taken into account.'' The success of the single currency, he said, ``demands that  the clear distribution of responsibilities'' between the central  bank and the EU's member governments be observed ``This clear separation of responsibilities is efficient,  transparent and conducive to accountability,'' Noyer said. ``Monetary policy makes its best possible contribution to the achievement of other goals by focusing on the primary objective of maintaining prices stability over the medium term.'' Noyer said growth in the euro region has the potential to reach 3.5 to 4.0 percent if structural reforms covering its labor, capital and product markets can be achieved.

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The European Commission  proposed watering down reporting requirements on bondholders as an alternative to a planned European Union withholding tax, in a last-dash bid to overcome a U.K. blockade on the levy.  The new plan would require the U.K. only to release names and addresses of non-resident investors, in line with current U.K. money-laundering regulations. Finance ministers from the 15 EU  nations will try to hammer out a solution tomorrow night ahead of  a summit of EU leaders in Helsinki Friday. ``The directive would require the U.K. neither to impose a  withholding tax on interest payments nor to introduce an additional layer of separate administrative requirements,'' the commission said.

The U.K. has said it will veto the withholding tax on the grounds it would cripple London's $3.3 trillion international bond  market and drive capital out of the EU. It also objected to the  cost of other information-sharing options proposed by the EU so far. Still, Britain has said it will adopt the information exchange principle if countries like Germany, Luxembourg and Austria abolish their banking-secrecy laws and do likewise.  The new proposals free existing bonds from the withholding  levy and provide protection against risk of early redemption,  including long-maturity bonds held by some institutional investors. A technical meeting with market operators should be  convened to work out the ``grandfathering'' clause.

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European Union plans for a  savings tax all but collapsed when EU countries led by Germany  rejected Britain's demand for an exemption for London's $3.3    trillion international bond market.  U.K. Chancellor of the Exchequer Gordon Brown rejected a last-ditch compromise calling for Britain to share limited  information on bondholders with other EU tax authorities.  Finland, holder of the EU presidency, said the most EU leaders  can do at today's summit is agree to discuss taxes next year. ``I'm extremely disappointed,'' German Finance Minister Hans Eichel said after finance ministers' talks broke down overnight. ``This is an annoying failure, but it's just a postponement.''

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The European Union hailed  the 11-nation euro as an engine of economic growth, while   steering clear of any comments on the currency's recent plunge.   An EU summit also took modest steps toward tighter   enforcement of the euro's deficit-limitation rules in order to  shore up investors' confidence in the 11-month-old currency.   With the euro hovering near all time lows against the U.S.  dollar, Japanese yen and British pound, EU leaders said the   economy's ``favorable outlook is supported by the successful   introduction of the euro.''

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The net foreign currency reserves of  the European System of Central Banks (ESCB or euro system) remained unchanged at 236.8 billion euros (dollars) in the week ended December 10, the ECB said on Tuesday. The ESCB comprises the European Central Bank and the national  central banks of the 11 euro-zone countries.

Among the items unrelated to monetary policy operations, assets  held in gold and gold receivables declined by 31 million euros to a total 114.955 billion euros as a result of the sale of 3.5 tonnes of gold by a national central bank, the ECB said in a statement. A central bank spokesman declined to disclose which central bank  was involved. But the sale was consistent with the 1999 Central Bank Gold  Agreement of September 26, the ECB said. Under that agreement, the 15 European central banks agreed not  to sell more than 2,000 tonnes of gold in the next five years at a rate of about 400 tonnes per year.

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No change in the ECB monetary stance.

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European government bonds fell, and  yields rose, on Friday led by a sharp rise in money market rates because of a growing belief that interest rates might be increased in the light of strong data on growth in Germany, dealers said.    Yields, or interest rates, rose by four to five basis points  after a rise of 16 points on Thursday. The yield on the euro-zone benchmark German 10-year bond dated  January 2010 rose to 5.229 percent from 5.190 percent late on Thursday and the yield on the French OAT bond dated October 2009 rose to 5.357 percent from 5.304 percent.

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 The Federal Open Market Committee made no change today in its  target for the federal funds rate. Based on the available evidence, however, the committee remains  concerned with the possibility that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the remarkable rise in productivity growth. Such trends could foster inflationary imbalances that would undermine the economy's exemplary performance. Nonetheless, in light of market uncertainties associated with  the century date change, the committee decided to adopt a symmetric directive in order to indicate that the focus of policy in the intermeeting period must be ensuring a smooth transition into the Year 2000. At its next meeting the committee will assess available information on the likely balance of supply and demand, conditions in financial markets and the possible need for adjustment in the stance of policy to contain inflationary pressures.

In an interview with the daily Die Welt,  ECB executive board member and chief economist Issing remained cagey about the possibility of direct intervention on the part of the central bank. Asked whether it would be appropriate for the ECB to intervene  directly on the forex markets and prop up the euro, Issing said: "We know from monetary history that intervention is only successful if it is coordinated between the big players and if it is carried out at the right moment.

"But we as a central bank will not determine in advance or even  say at all whether and when the right moment has come." Issing insisted that the euro had potential to rise again. Issing described the euro as "a currency with an internal  stability which has only rarely been seen this century. "As a currency with a stable internal value, there is great  potential that the euro's external value will rise." It was more important for the ECB to pursue its primary task to  safeguard price stability in the 11-country euro zone, Issing argued.

In an interview with the daily Frankfurter Allgemeine Zeitung,  president Duisenberg conceded that there was a real danger that the slide in the value of the single currency on the foreign exchange markets since its launch in January could undermine public confidence. "That is really the only ground for concern at the moment," he  told the newspaper. "The public looks at the euro's external value and thinks it is a weak currency. What they don't really recognise is that the currency is internally very stable."

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The pace of expansion in  the euro region's money supply accelerated in November as banks made more loans, fanning expectations that the European Central Bank will increase interest rates.   M3 money supply growth, which the central bank uses to  forecast future inflation trends, rose at a 6.2 percent annual   pace, up from a revised 5.8 percent in October. The bank's 4.5 percent target for money supply growth was exceeded every month this year.

A growing number of analysts expect the ECB will raise  interest rates in the first quarter. Faster economic growth,  rising oil prices and the euro's decline have pushed prices higher. The euro region's inflation rate rose to 1.6 percent in November, up from 1.4 percent in October, moving closer to the ECB's ceiling of 2 percent. European bonds fell following the release. The yield on the  German government's 10-year bond, Europe's benchmark, rose 6 basis points to 5.29 percent, its highest in two months.  Interest-rate futures contracts indicate that investors  expect at least one ECB rate increase in the first half of next year. The June contract for three-month Euribor futures has an  implied yield of 3.98 percent, 98 basis points above the ECB's benchmark rate, the amount it charges banks for two-week loans. The ECB cited buoyant M3 growth as a key reason for raising  its benchmark lending rate by half a point to 3 percent in November. An increase in money in circulation suggests that shoppers are likely to boost spending, allowing retailers to raise prices.

Bank lending to companies and private households rose at an annual rate of 11 percent in November, after an annual 10.5 percent increase in October. Overall credit lending rose at a rate of 8.5 percent, compared with 8 percent the month before. Long-term financial liabilities -- investment in longer-term securities or savings accounts that take money out of M3 -- rose at an annual rate of 7.2 percent last month. Long-term  investment had expanded at an annual rate of 6.8 percent in  October.

Economic growth in the euro zone is likely to expand 2.9  percent next year, the quickest pace since 1990 and up from 2.1 percent this year, according to European Commission forecasts. ECB President Wim Duisenberg said he expects growth in the euro area of about 3 percent in both 2000 and 2001.

The U.S. DOLLAR rose against the euro, touching its highest level in almost two weeks, as rising U.S. stocks helped boost demand for the currency. The dollar rose to $1.0062 per euro from $1.0132 late Monday in New York, and reached $1.0038, its highest level against the regional currency since Dec. 15. The dollar was little changed  against the yen at 102.26 yen from 102.24 yen. The euro fell to 102.86 yen from 103.58.