The more cautious ECB stance will limit short-term Euro recoveries against the dollar

The dollar weakened back to beyond 1.48 against the Euro in early US trading on Wednesday, but then strengthened sharply as European markets drew towards a close. The Euro weakened to lows near 1.4600 before recovering to 1.4650. The dollar again tested the 1.46 level in European trading on Thursday.

ECB member Mersch stated that downside risks to the Euro-zone economy had increased while the bank could downgrade its 2008 GDP growth forecasts. Mersch also stated that the ECB would need to act with caution given the economic uncertainties. The mood of caution was echoed in the ECB monthly report and the overall stance by European officials appears more cautious

The comments will reinforce unease over a slowdown in the Euro-zone economy while there will also be much reduced speculation that the ECB will be in a position to increase interest rates with some speculation over a move to cut rates.