LONDON (AFX) - The euro weakened slightly against the dollar in early London trade, against the disheartening scenario of high inflation, weakening growth and declining French business confidence, dealers said.
Weaker-than-expected May French business confidence of -17 hit sentiment in what dealers said was a sign that the euro zone slowdown is now having an impact on France, which has been resilient until now. The data follows yesterday's higher-than-expected Italian inflation figures.
"This is not going to help the euro," said CIBC's Audrey Childe-Freeman, adding that there was a case for the European Central Bank's governing council to cut interest rates again. Earlier, one of Germany's five economic wise men, Juergen Kromphardt called for the ECB to cut interest rates by a further 0.5 pct.
And yesterday the president of Germany's Ifo research institute, Hans Werner Sinn, said the ECB should follow up its recent 0.25 pct rate reduction with another cut.
"I think that's the right way. I totally agree with him. It's becoming increasingly urgent," said Childe-Freeman. She expects a quiet directionless week for currencies, with investors cautious ahead of the U.S. non-farm payroll data out on Friday.
She sees further downside to the euro despite a stabilisation in the euro over the last week after rumours of ECB intervention which, she said, also limited the impact of the French business confidence data.
"As we move along the week if we get any kind of strength in the U.S. non-farm payroll data the euro is going to end the week lower." Both Childe-Freeman and IDEAGlobal.com global strategist Simon Hayley dismissed market rumours last night of Bank of Japan intervention.
Childe-Freeman said, "At the end of the day there was no intervention. It was just a German bank giving a large commercial order. Because the market was probably quite thin, it had quite a strong impact on euro-yen and that triggered talk about intervention." Hayley added, "it does illustrate how nervous the markets are at the moment."
Last night's failure of the Lucent Technologies Inc and Alcatel SA merger talks, which was expected to be euro-positive in terms of corporate capital flows, had little impact.
"It may have been a story last night but it's not this morning. None of my traders have mentioned it," said Childe-Freeman. The euro also failed to react to this morning's M3 figures. Euro area adjusted M3 grew 4.7 pct year-on-year in April, up from a year-on-year growth rate of 4.6 pct in March.
The three month moving average of adjusted M3 year-on-year growth rates was 4.6 pct in the February-April period compared with 4.5 pct in January-March.
The yen also weakened slightly against the dollar in early trade on overnight losses in the Nikkei, dealer said.