Surging euro adds to pressure on ECB to cut rates

The European Central Bank came under fresh pressure to cut interest rates later today after the euro hit fresh highs against the dollar and sterling yesterday while manufacturing orders plunged and unemployment surged in Germany.

Economists said the bank needed to stimulate domestic demand in the 12-nation zone to offset the pain that a rising euro would inflict on exporters. However, that would require a sharp U-turn after repeated hints by ECB officials that it plans to leave rates on hold.

The ECB sets rates less than an hour after the Bank of England makes its decision. The outcomes of both meetings were on a knife-edge last night.

The single currency broke through the $1.14 level against the US dollar, at one point hitting $1.145 as the dollar slumped. This is the highest level since January 1999 and means the currency has surged almost 8 per cent since the start of the year. It hit 71p against the pound, the highest level in six years.

The impact on Continental industry was highlighted by figures yesterday showing that orders for German manufactured goods plunged 3.9 per cent in March. Unemployment in Europe's largest economy surged by 44,000 last month to 4.46 million, the highest for more than five years. It was the worst for an April since the Second World War.

A senior member of Germany's ruling Social Democratic party called for a rate cut. "The ECB should provide some monetary policy help tomorrow," Ludwig Stiegler said. "Unemployment in Germany and Europe is still clearly too high."

Francis Mer, the French finance minister, said the current exchange rate was "tolerable" but added: "If it rose to $1.20 or $1.25 it would start to hurt the level of profitability of big exporters selling in dollars."

The financial markets rushed to price in a rate cut over the summer that some analysts now believe could come as soon as tomorrow. "The ECB would be well advised to cut rates by 50 basis points tomorrow," Colin Warren at analysts GFC Economics said. "The stronger currency is clearly starting to take its toll."

He said that while a rate cut was unlikely to stop the rise in the euro, which was driven by worries over the US deficits, lower rates would stimulate domestic demand. But Lorenzo Codogno, an economist at Bank of America, said that lower inflation and oil prices means the ECB should be in "no rush" to cut rates.

Meanwhile, the pound's fall added to speculation the Bank of England will keep rates on hold today. Sterling has depreciated 8.1 per cent against the euro, its main trading currency, this year. The Bank will be worried this could stimulate inflation as prices of imports rose and economic growth picked up.

However, there was some last-minute ammunition for advocates of a rate cut from a survey showing demand by UK companies for new workers slumped in April. Recruitment agencies said demand for staff fell at the fastest rate since the aftermath of the 2001 US terrorist attacks. The survey by the Recruitment and Employment Confederation will fuel fears the economy failed to benefit from a "Baghdad bounce" since the end to the Iraqi war.