Europe is worried about the dollar but isn''t ready to intervene

Section:

Trichet Warning Brings Relief for Dollar

By Ambrose Evans-Pritchard
The Telegraph, London
Friday, December 3, 2004

www.telegraph.co.uk

BRUSSELS -- The US dollar rallied sharply yesterday
after the European Central Bank warned currency
speculators not to push their luck.

Jean-Claude Trichet, the ECB's president, said market
intervention was "a weapon" at the disposal of every
central bank.

His comments sent the pound sharply down against the
dollar, losing close to a cent between 3 o'clock and the
close of the market in London, where it finished at
$1.9243. The euro also dropped to close at $1.3267.

"We consider that the recent [currency] moves are
unwelcome," he added, abruptly halting the euro's
surge to record levels over recent days. The comments
came as the ECB held interest rates at 2 percent for the
18th month in a row. The bank is caught in a
"stagflation" dilemma, facing price pressure and
stalling output at the same time.

German growth has petered out, falling to 0.1 percent
in the third quarter. Fresh data yesterday showed a rise
in German unemployment to 10.8 percent, the worst
level in six years.

Mr Trichet's veiled threat followed reports from Tokyo
that Japanese and EU officials had discussed joint
action to boost the dollar.

Using the language of currency warfare, a Japanese
finance ministry official was quoted saying the victims
of the dollar devaluation had to "defend themselves."

EU officials have long hinted that a dollar exchange
rate of $1.35 against the euro is the "line in the sand"
that will trigger action. This week the euro surpassed
$1.33, a 60 percent rise over four years.

Since many of the world's currencies are pegged to the
dollar, either directly or by "dirty floats," the eurozone
has borne the brunt of the adjustment. There is now a
growing risk that the soaring exchange rate will tip the
eurozone into recession.

Martin Wansleben, head of Germany's DIHK trade
association, said any exchange rate above $1.20 stifled
the German export industry. "Now we've reached the
zone of pain, it's starting to hurt really badly," he said.

Silvio Berlusconi, Italy's premier, has been railing
publicly about "the pain of the euro." In a recent
outburst, he said the whole structure of monetary union
was driving Europe's distressed economies into deeper
trouble.

"The blessed introduction of the single currency has
thus far produced the exact opposite result of what the
euro was created for. It has led to an asphyxiated
economy and hobbled growth under the burden of
'stupid' rules," he said.

ECB officials are loath to cut rates to cool the euro,
or to cause monetary havoc by supporting the dollar
through a massive long-term purchase of US bonds.

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