Euro Falls as Economic Outlook Darkens in Europe

While figures to be published in Germany next Thursday are forecast to show Europe's biggest economy contracting by 0.8 percent in the second quarter, the European Commission statistics office is expected to say that growth in the 15-member euro zone slumped by 0.2 percent in the third months.

Speaking following a meeting Thursday of the ECB, the Frankfurt-based bank chief, Jean-Claude Trichet told a press conference that the risks facing the euro zone economy were starting to materialize.

"The uncertainty surrounding (the) outlook for economic activity remains high," Trichet said with the global economy hit by high energy costs, on-going financial market tensions and weakening economic growth.

After the ECB raised borrowing costs by 25 basis points to 4.25 percent at the start of July to ward off renewed inflationary pressures, Trichet told reporters that the bank now did not have a bias on interest rates.

The result was to undercut the euro which has chalked up big gains over the last year as worries have set in about the outlook for the giant US economy. Last month the euro hit an all-time high of more than $1.60.

Under pressure

But amid talk that Europe could slide into recession and with the ECB sitting tight on monetary policy, the euro remained under pressure Friday falling by more than 1 percent to 1.5122 against the dollar. This in turn has raised the prospects that the common currency could drop to 1.50 in the coming weeks.

The euro's fall against the greenback helped on Friday to underpin leading European export stocks such as carmakers. However, the common currency's drop also came as economists began to revise down their European growth forecasts as a batch of gloomy economic data continued to roll in.

After a two-year economic upswing, Germany bounded into the new year chalking up a solid 1.5 percent growth rate in the first quarter, which translated into a yearly expansion rate of 2.6 percent. This had helped to raise hopes that Germany might be able to avoid the worst of the fallout from the slowing world economy.

Confidence is down

But now with factory order books shrinking, business confidence at a three-year low and the mood among consumers sharply down, economists expect next week's German GDP figures will show the nation's economy expanding by 1.7 percent year-in-year in the second quarter. This is expected to follow the economy slumping 0.8 percent quarter on quarter in the three months to the end of June.

A rundown in economic growth in Germany, is also likely to drag down the economic performance of the euro zone where several states such as Italy, Spain and Ireland already appear to be edging towards recession. The forecast 0.2 percent fall in the euro zone's second-quarter growth rate follows a 0.7 percent expansion during the first three months of the year.

Year-on-year, the euro zone expanded by 2.1 percent during the first quarter. However, the official data to be released next Thursday is forecast to show year-on-year growth slowing to 1.5 percent in the three months to the end of June.

But a reminder of the pressures facing the ECB, data also to be released next is tipped to confirm euro zone inflation hit a record 4.1 percent last month.