LONDON (AFX) - The euro firmed in early trade after European Central Bank chief economist Otmar Issing kept alive the prospect of intervention to support the flagging single currency, dealers said. Dealers said Issing, who this morning echoed yesterday's comments by Bank of France governor Jean-Claude Trichet and Bundesbank president Ernst Welteke, helped lift the euro.
Issing said intervention is an instrument available to support the euro, that the ECB is interested in a strong single currency and that the euro's weakness has a negative effect on inflation.
"The comments yesterday from Trichet and Welteke were taken reasonably well and helped the euro claw its way back up above 0.8500 usd," Halifax economist Steven Pearson said.
"Issing's pretty reiterated their message, giving the standard line that the ECB doesn't talk about intervention but showing interest in a strong euro, which is what's important for the currency markets," he said.
Dealers said the ECB comments do not necessarily signal a round of central bank intervention.
"Obviously this is a signal of the ECB's displeasure at the level of the euro but I'm not convinced it's a precursor to intervention," Pearson said.
"I think the ECB will be cautious about when and how it intervenes," he said.
In the UK, sterling bounced back slightly against the dollar in a continuation of volatile trading on nervousness about the government's euro entry intentions following its re-election last week by a large majority.
Dealers noted receding rate cut hopes after a warning by Bank of England governor Eddie George last night that a sharp fall in sterling could trigger inflationary pressures.
George and senior treasury aide Ed Balls cautioned against any moves to manage down the value of sterling to ease entry into the euro.
"People are now concerned that all this talk of euro entry and convergence could well lead to short-term interest rate divergence because of the impact on inflation of a weaker currency," Peason said. Dealers said market participants will watch this morning's UK average earnings figures for April for clues on the likelihood of a rate cut at the July meeting of the BoE's monetary policy committee. In the U.S., retail sales figures for May will give an indication of the success or otherwise of the Federal Reserve's aggressive monetary easing in response to the economic slowdown.