Leader of euro group finance ministers urges U.S. to curb fall of dollar


International Herald Tribune

Leader of euro group finance ministers urges U.S. to curb fall of dollar

Tuesday, October 2, 2007

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FRANKFURT: The chief political spokesman for the euro has added his voice to demands for the United States to make a greater effort to curb the dollar’s strong fall – presaging tense times at the Group of 7 meeting this month in Washington.

Jean-Claude Juncker, who heads the group of finance ministers from the 13-nation euro zone, criticized the perceived indifference in Washington toward U.S. policies – including trade and budget deficits – that most economists believe are contributing to the intense downward pressure on the dollar.

“Europe cannot be the area of the world’s economy that will bear the consequences of others’ inaction,” Juncker said late Monday, Reuters reported.

The statement from Juncker, who generally avoids speaking about exchange rates, represented the strongest evidence to date that European discomfort with the euro is spreading beyond France, where complaints about the euro’s strength have increased since the election of President Nicolas Sarkozy.

Juncker’s remarks helped break an eight-day streak of records for the euro, which peaked at nearly $1.43 late Monday in New York.

Nevertheless, there is rising frustration in Europe about the lack of effective tools for slowing the euro’s appreciation, which could eventually hamper economic growth by making European exports – a vital ingredient in the current recovery – more expensive to customers outside the euro zone.

But the European Central Bank, focused on inflation risks, appears intent on maintaining a course for higher interest rates when it meets on Thursday. That will offer little relief to the euro – and may even accelerate its rise.

Protestations to the contrary, U.S. officials seem content to let the dollar decline and there is little prospect of an agreement to the contrary when the G-7 finance ministers and central bankers meet in Washington on Oct. 19.

“The Europeans are having a one-way conversation with themselves,” said Stephen Jen, head of currency research at Morgan Stanley in London. “And really, only the European politicians, not even the central bankers.”

Juncker, who is also prime minister and finance minister of Luxembourg, cited “global imbalances” as his main concern, a reference to last year’s $850 billion U.S. current account deficit, a broad measure of the trade deficit that includes capital flows. That deficit has put downward pressure on the dollar for years, because of fears that investors might stop providing Americans with the money to continue their import binge.

“Italian exports are enjoying a boom even with the euro at $1.41, but there’s no hiding certain concerns for the global macroeconomic situation,” Emma Bonino, Italy’s European affairs minister, said Tuesday, Reuters reported.

Jean-Claude Trichet, president of the European Central Bank, has declined to try to talk the euro down any more than G-7 officials already have.

On Monday, he said he had “noted with extreme attention” recent statements by U.S. officials that they favor a strong dollar – a slightly stronger version of the formulation that the G-7 settled on at its last meeting earlier this year in Germany, and one that did not impress currency traders then or now.

The jury is still out on whether the euro-zone countries can hammer out a common position on currency policy when they meet next Monday – especially since Germany, their largest member, has been notably reluctant to wade into the matter.

Though German companies have reported some negative effects, Finance Minister Peer Steinbrück has stayed sanguine, even going so far as to declare his “love” for a strong euro.

But his French counterpart, Christine Lagarde, said in an interview with Les Echoes, published Tuesday, that Paris was intent on pushing hard and would consult other Europeans in the coming days on a joint initiative to rein in the euro.

Even if the euro-zone countries can find a single voice, the United States seems certain to resist any effort at the G-7 to ease the dollar’s decline.

In fact, to date the United States has enjoyed mostly the benefits of the weaker dollar in the form of a slowly declining trade deficit since late 2005, while data from bond markets suggest that foreigners are still willing to hold U.S. assets even as the dollar edges downward.

“In words, we have a strong dollar policy,” said Michael Woolfolk, senior currency analyst at Bank of New York Mellon in New York. “In action, we have a policy that favors a stable dollar in the form of a slow, steady decline.”

The euro’s rise has also ridden the back of differentials in interest rates in the United States and the euro zone – a fact that makes euro-denominated assets more appealing. That too shows little sign of changing.

When the U.S. Federal Reserve slashed its benchmark rate by a half percentage point in September to combat both financial market instability and the weakening U.S. economy, it put the United States on a very different path than the euro zone.

Though it put one rate increase on hold, the ECB is still signaling that it sees inflation as the greater risk, which means it is more likely to increase borrowing costs than to hold them steady in the coming months.

Some currency traders have nursed hopes that the ECB would shift its stance on Thursday and would hint that the strong euro and the credit crunch that emanated from the collapsing U.S. mortgage market were raising the risks to growth and dampening the prospect of higher inflation.

“There is no evidence that the bank is looking to decide that way,” said Erik Nielsen, chief Europe economist at Goldman Sachs, “so this kind of hope is in vain.”

Last week, senior ECB officials publicly played down this prospect, saying that the strong euro had not harmed growth and that the effects of the credit crisis remained uncertain.


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