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Ecb declines to act on relentless euro { January 9 2004 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A2116-2004Jan8.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A2116-2004Jan8.html
No Brakes On the Euro
European Central Bank Declines To Act to Slow Rise Against Dollar
By Keith B. Richburg
Washington Post Foreign Service
Friday, January 9, 2004; Page E01
PARIS, Jan. 8 -- Europe's common currency, the euro, resumed its relentless months-long climb against the dollar Thursday after the head of the European Central Bank, Jean-Claude Trichet, signaled he was not overly concerned that the dramatic ascent posed a risk to the continent's nascent, export-led economic recovery.
The euro rose to just under $1.28 in late New York trading, after dipping briefly Wednesday when traders began speculating whether Trichet, once dubbed "Mr. Euro," would use today's ECB meeting to announce a new, more aggressive intervention strategy to halt the currency's rapid rise.
The euro has now risen about 10 percent in value in the past two months, and about 40 percent over the past two years. European economists and policymakers were not long ago fretting that the common currency was too weak in relation to the dollar, but now many of those same policymakers are worried that the euro has soared too far, too fast, and will soon make European exports too costly on the world market.
"I cannot imagine the American consumer not feeling these increases, due to the euro, in terms of their personal budget," said Daniel Lorson, communications director for the French Champagne Trade Association, which counts the United States as its second-largest export market after Britain.
Few in Europe expected the bank to change its current, low 2 percent benchmark interest rate -- and indeed that was left unchanged -- but many had been speculating that Trichet might use his first public comments since Dec. 18 to express concern about the euro's rapid rise.
Instead, what they got was what analysts summed up as a policy of "benign neglect" from the central bank. "Although recent exchange rate developments are likely to have some dampening effects on exports, export growth should continue to benefit from the dynamic expansion of the world economy," Trichet told reporters in Frankfurt, Germany, the bank's headquarters.
Trichet acknowledged that the high euro value was "having a negative impact on the price competitiveness of euro area exporters," but he added, "Thus far, this should be partly compensated for by the ongoing expansion of global demand."
The currency markets responded with a fall in the dollar, and some analysts said they expected the euro to strengthen even further, perhaps hitting a high of $1.35 or even $1.40 before the end of the year.
"There is absolutely no sign of anxiety. There is no sign the ECB is about to do something, which explains the market reaction," said Dominique Barbet, senior economist with BNP Paribas Bank in Paris. "The ECB is not -- just not -- considering rate cuts at this stage. They do not see a crisis."
Germany's economics and labor minister, Wolfgang Clement, told the weekly Der Spiegel that he was disappointed the ECB had not acted more aggressively Thursday. Earlier, before Trichet's comments, he told reporters that "the extraordinary development of the euro, and the weakness of the dollar, is a special risk."
Only 10 percent of German exports are produced for the U.S. market, but they tend to be in key areas, such as automobile manufacturing and engineering. German officials are worried that any slowdown of exports in those sectors could lead to layoffs.
The European Commission's trade commissioner, Pascal Lamy, had also expressed concern about the strength of the euro and its effects on Europe's recovery. And the Belgian prime minister, Guy Verhofstadt, said any further appreciation of the euro would be "disastrous" for Europe.
Some analysts said despite the political pressures from policymakers, Trichet and the central bank may have been confronted with other, competing issues. First, with interest rates already low at 2 percent, the bank's room for maneuver is limited, and new figures showing October-to-November euro zone inflation at just 0.1 percent means price pressures remain negligible.
More important, these European analysts said, the ECB is facing a U.S. administration that seems determined to pursue a weak dollar strategy, in an effort to boost American exports in a presidential election year.
If there is a policy disagreement between the U.S. and European sides , the Europeans are unlikely to allow that dispute to show publicly, economists and currency traders said.
Also, while the euro's rise has been dramatic -- 22 percent over the last year -- some currency experts said what was more important was the gradual, steady pace of that appreciation. "If you would move at a very aggressive speed towards $1.30 or $1.35 in the coming month, that would change the picture," said a currency analyst with KBC Market Research in Brussels. He and others said they believed that level was now looking realistic.
Many large companies and exporters have had a muted reaction to the rising value of the euro for a simple reason: Globalization means that many European companies have plants producing in the United States, and large firms are hedged against currency fluctuations.
For example, BMW, the German carmaker, has "natural hedging" because it has a plant producing cars in Spartanburg, S.C., spokesman Marc Hassinger said. Also, the German company Siemens has 70,000 to 75,000 employees in the United States, spokesman Thomas Weber said.
The worldwide chemical company BASF provides a classic example of the new "hedge" of globalization; 90 percent of what the firm makes in the United States is also sold in the U.S. market, providing a natural hedge against currency fluctuations, said spokesman Michael Grabicki.
Special correspondent Shannon Smiley in Berlin contributed to this report.
© 2004 The Washington Post Company
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