Economic tensions rise as euro, oil prices surge to record

While the common currency hit a new record of $1.4318, fresh upward pressure on energy prices emerged when oil prices jumped to a new high of more than 90 dollars a barrel in Asian trading.

Friday’s gathering of Group of Seven (G7) finance ministers and central bankers forms part of the build-up to the annual World Bank and International Monetary Fund meeting in the US capital. The euro’s new high Friday came just one day after it sailed past $1.43 on the back of concerns about the economic fallout from the US housing crisis, with leading banks setting out details of the impact of the upheaval on their balance sheets. The euro’s latest increase raises the prospects of the single currency shooting past the critical 1.45 level by the end of the year, analysts say.

By mid-morning Europe’s common currency slipped back below $1.43 after springing from record high to record in recent months as fears have grown that the credit crunch triggered by the jump in defaults in the risky US mortgage business. The currency’s ascent has also coincided with an escalating oil price, which breached the key 90-dollar-a-barrel mark after hitting another record high earlier this week.

At the same time, the surge in the euro has fuelled concerns about the outlook for the 13-member eurozone’s export machine, with analysts expecting the currency bloc’s economy to slow as it enters the new year. In addition, the single currency’s seemingly relentless rise on forex markets has been underpinned by expectations that the US Federal Reserve could cut interest rates again by the end of the year.

Meanwhile, monetary policy in the eurozone is finely balanced with interest rates on hold as the European Central Bank weighs up the implications of the credit squeeze. The euro’s current strength is a long way from the common currency’s early days following its 1999 launch. With the eurozone overshadowed by what was then robust US economic growth, the euro sank to a record low of 82.52 US cents in October 2000. (m&c.com)