Home News ECB steps up moves to stem euro’s rise

ECB steps up moves to stem euro’s rise

Published on 14/01/2004

14 January 2004

FRANKFURT – The European Central Bank has stepped up moves to stem the soaring euro with leading ECB officials expressing concern about the common currency’s recent rapid rise against the dollar.

Bank of France head Christian Noyer Wednesday became the latest member of the bank’s governing council to highlight ECB worries about the sharp escalation in the euro, which has raced ahead by more than 20 percent against the dollar over the last 12 months.

While saying that it was not advisable to “overdramatize” the strength of the euro, Noyer told French television that sudden movements in the currency were not for global growth and that the ECB would remain vigilant in monitoring developments in the forex market adding that intervention was also open to the bank.

Noyer’s comments also appear to represent the latest attempt by the ECB to verbally intervene in the forex market and consequently to avoid lowering interest rates as way of checking the euro’s advance.

After appearing to head towards the key mark of USD 1.30 earlier this week, the euro slipped in European trading following the remarks by the ECB officials and was hovering around USD 1.26 Wednesday.

The comments by members of the ECB’s rate-setting council come ahead of a meeting early next month of the Group of Seven leading industrial states with financial markets already starting to speculate on whether the finance ministers attending the G-7 gathering in Florida will also move to pass judgement on the euro- dollar rate.

Earlier this week ECB chief Jean-Claude Trichet said “brutal” swings in the currency markets were unwelcome with governing council member and German Bundesbank president Ernst Welteke also expressing worries that the euro’s ascent could threaten the recovery in the 12- member euro zone.

Trichet’s remarks this week also came after he appeared to step back from repeating the traditional central bank mantra of endorsing a strong currency during comments to reporters following last Thursday’s ECB meeting.

“They are moving towards verbal intervention (to stem the euro’s rise),” said Rainer Guntermann, European economist with investment house Dresdner Kleinwort Wasserstein.

The acceleration in the euro, which has gained about 40 percent against the dollar in the last two years, has set alarm bells ringing across the euro zone’s political and business establishment about the outlook for the currency bloc’s export machine.

While expressing cautious optimism about the economic prospects for 2004, Welteke told a Bundesbank seminar in Berlin this week that “we fear that the rise of the euro could act to brake the economic upswing in the euroland, especially in export-orientated Germany.”

His comments also highlight the prospect of growing tensions between European and U.S. monetary policymakers over the dollar’s fall in the build up to the G-7 Florida meeting.

This is especially the case as U.S. Federal Reserve Bank chairman Alan Greenspan, speaking at the same Berlin seminar, indicated that he was not too worried about the greenback’s decline.

According to Guntermann from Dresdner Kleinwort Wasserstein, the signs of an economic pickup in the eurozone combined with inflation remaining above the ECB’s two per cent target meant that the ECB would not want to cut rates at this point.

Moreover, the ECB is unlikely to want to move on rates when the debate about the fiscal rules as set out in the Stability and Growth Pact has been reopened.

This follows the European Commission’s decision announced Tuesday to mount a legal challenge to the European Union finance ministers’ deal to allow France and Germany to escape fines under the pact.

But analysts say the risk for the ECB in essentially trying to talk the euro down is that at some point it could provoke a power struggle between the bank and the markets over the value of the euro.

This is particularly the case as the euro’s advance is more a result of dollar weakness with the US’s so-called twin deficits, and the interest rate gap between the US and the eurozone seen as the key factors in driving the greenback down.


Subject: German news