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Euro enjoys only brief respite on IG Metall deal

TOKYO: The euro was boosted in late on Tuesday afternoon trade in Tokyo after Germany's largest trade union, IG Metall, agreed on a pay offer from employers in North Rhine Westphalia.

But its gains were short-lived as dealers and analysts said the deal was not enough to stem a trend of capital outflows from the euro zone, or to bring market sentiment back into the euro's favour.

The news of IG Metall's wage deal helped the euro rise to intraday highs around $0.9691 and 103.32 yen, after falling as low as $0.9648 and 102.65 yen earlier in the day.

The two-stage IG Metall wage deal envisages a 3.0 percent wage rise this year and a 2.1 percent rise next year, but fell short of IG Metall's demand for a 5.5 percent wage hike.

Analysts said the lower rise in wages was positive for the euro as it suggests that the euro zone labour market may be moving closer to global standards.

"The need for structural reform to tackle deficiencies in euro zone labour markets such as the high cost of labour has long been a market focus, and the wage agreement is encouraging in this respect," said Daisaku Ueno, senior economist for Nomura Research Institute Ltd.

But dealers and analysts agreed that the wage agreement by itself would not lift the euro, which has suffered due to direct investment flows out of Europe into Japan and the United States, out of its doldrums. Nomura's Ueno said the wage deal could also be negative for the euro as it falls short of IG Metall's demand for a 5.5 percent increase, and could lessen the need for the European Central Bank to tighten credit aggressively.

After rising to its intraday highs on the wage deal, the euro quickly pared its gains and was quoted at $0.9673/75 and 102.92/09 yen against $0.9665 and 102.98 yen in late US trading on Monday.-Reuters