Calls grow for ECB intervention to stop rise of euro


By Peter Garnham
Financial Times, London
Tuesday, October 2, 2007

The recent rise of the euro has sparked a chorus of disapproval from the region's exporters and politicians, but analysts say it may now be approaching levels that could even push central banks into action.

The euro has hit a fresh high against the dollar for the last nine trading sessions, touching $1.4281 on Monday. This took the euro's gains against the dollar so far this year to 7.8 per cent.

The single currency has been boosted by the continued hawkish interest rate stance from the European Central Bank, which has repeatedly indicated that it has no intention of cutting eurozone interest rates. In contrast, US interest rates are expected to continue on their downward path, putting further pressure on the dollar.

Eurozone politicians have been quick to voice concern over the euro's rise. Joaquin Almunia, the EU's commissioner for economic and monetary affairs, said Europe could not stand by passively if the dollar continued to weaken.

Meanwhile, Jean-Claude Juncker, the prime minister and minister of finance of Luxembourg, said Europe could no longer accept footing the bill for global imbalances and that the matter would be discussed at the upcoming Group of Seven meeting of finance ministers and central bankers in Washington on October 20.

John Normand, currency strategist at JPMorgan, says the ECB has been remarkably relaxed in the face of a 70 per-cent appreciation in the euro against the dollar in the past seven years.

However, he says that is likely to change as growth momentum in the region fades and inflation becomes less of a pressing policy issue.

"Towards $1.50 in euro/dollar, the judgment of policy makers is likely to shift -- from accepting currency strength as a reflection of economic vitality and as an inflationary bulwark, to resisting currency appreciation as an undesirable headwind to the economy," says Mr Normand.

Indeed, analysts say the upcoming G7 meeting is shaping up to be one of the most important meetings of the past few years for currencies.

Simon Derrick at Bank of New York Mellon says the euro breaking through $1.40 against the dollar will start investors wondering whether the G7 will break with recent history and make a specific reference to currency misalignment in its post-meeting statement.

He says it is also possible that Jean-Claude Trichet, ECB president, will canvas other central banks with a view to intervene in the currency markets to stem the euro's rise.

However, Mr Derrick says the ECB is unlikely to act unilaterally given that credibility is all when it comes to central bank intervention in the currency markets, particularly since the Bank of Japan was widely perceived as failing in its campaign to stem the yen's advance in 2003 and 2004, and given the size of the foreign exchange market today.

"It seems unlikely that any operation will be attempted unless it is a multilateral affair. That's why it is important what the Americans think," says Mr Derrick. "It seems clear to me Mr Trichet will pressure them over the next few weeks, but I'm not sure they will respond."

Indeed, Mr Trichet seemed to be stepping up his verbal campaign on Monday, pointedly reminding investors that the US Treasury and the Fed have said a strong dollar is in the interest of the US.

Mansoor Mohi-uddin at UBS believes Mr Trichet could be successful in persuading the US into action.

"Clearly a much weaker dollar from here would make life more difficult for the Fed," he says. "With America's bond curve steepening and commodity prices staying high, sustained exchange rate weakness would help revive inflationary expectations at a time when the Fed is easing monetary policy."

He says that if the dollar continues to slide, the G7 can warn the markets that its members stand ready to act.

"The last intervention in currency markets by G7 members in September 2000 helped put a long-term floor under the single currency," says Mr Mohi-uddin. "So any warning about the risk of intervention should be heeded by market participants now."

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