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Section: Daily Dispatches

Trichet, EU Finance Chiefs
Urge U.S. to Fight Dollar's Decline

By James G. Neuger
Bloomberg News Service
Tuesday, December 7, 2004

European Central Bank President Jean-Claude
Trichet joined European finance ministers in
urging the U.S. to halt the decline of the dollar,
warning that the currency's slide risks derailing
global growth.

Making a rare appearance at a press conference
after meeting with European finance ministers,
Trichet said the U.S., Europe, and Asia have to
do their "homework" to reverse the euro's
record-setting run against the dollar.

"We have a joint statement which clearly says that
all major countries and economic areas must play
their part more actively in reducing global
imbalances," Trichet said late yesterday in Brussels.

With the euro's rise curbing exports, growth in the
$10 trillion economy slipped to 0.3 percent in the
third quarter, the weakest pace in more than a year.
The ECB last week scaled back its 2005 forecast to
growth of 1.9 percent from a previous estimate of
2.3 percent.

Exports make up a fifth of the European economy,
twice as much as in the U.S., making growth
vulnerable to the euro's jump of 8.2 percent against
the dollar since Oct. 1. The euro bought $1.3408 at
11:50 p.m. Brussels time, close to the record
$1.3460 set Dec. 3.

European Union Monetary Commissioner Joaquin
Almunia said the 12-nation economy of the euro
region appears to be in worse shape than on Oct.
26 when he cut his growth forecast for 2005 to 2
percent from 2.3 percent.

"Since the publication of those forecasts we have
become somewhat more worried," Almunia told the
news conference. "Some of the downside risks that
we presented then may be materializing."

Business confidence stagnated for the third month in
November, and manufacturing and service industries
expanded at their slowest pace in more than a year.
Retail sales fell for a fourth month in November as
job cuts and pessimism about the economy
discouraged consumer spending, the Bloomberg
purchasing managers index showed yesterday.

Germany's DaimlerChrysler AG, the world's
fifth-biggest carmaker, said Nov. 26 the dollar's
drop will reduce profit at its Mercedes-Benz unit.

The meeting's chairman, Dutch Finance Minister
Gerrit Zalm, said the ministers are counting on
pro-growth policies in Europe and deficit cuts in
the U.S. to reverse the euro's rise, and aren't
pushing the central bank to cut interest rates or
sell euros.

"The best solution would be that we would have
policies in place in Europe, structural reforms
which can enhance growth," Zalm said in an
interview. "The United States would put policies
in place to raise their level of savings."

Yesterday's written statement -- the first since
the euro approached $1.30 in January -- and
Trichet's post-meeting appearance marked an
escalation of European rhetoric that has failed
so far to turn the euro around.

"The language has been firmed up a bit, in
particular, the sentence about 'we will monitor
the situation' signals that they are looking closely
at the price action at this stage," said Jens Nordvig,
a currency strategist at Goldman Sachs Group Inc.
in New York. "It is also relevant that it is signed as
a joint statement, which has not happened for some

Finance chiefs blamed the euro's rise on the widening
of the U.S. budget and trade deficits, with Austria's
Karl-Heinz Grasser calling for a "dialogue" with U.S.
President George W. Bush's new economic team.

"It is unacceptable that Europe is paying the bill for
some major imbalances in the world economy,
especially the current-account and budget deficits in
the U.S.," Grasser said.

Asked about the European complaints, U.S. Treasury
spokesman Rob Nichols said "on the issue of
currencies, our views are very known." Treasury
Secretary John Snow said in an interview last week
the U.S. supports a strong dollar whose value is set
by financial markets.

Flagging growth with unemployment at a five-year high
of 8.9 percent has led investors to trim expectations
for an interest-rate rise, futures trading shows. The
rate on the three-month Euribor futures contract for
June settlement has dropped to 2.24 percent from
2.54 percent on Oct. 1.

The contracts settle to the three-month interbank
lending rate for the euro, which has averaged 15
basis points more than the ECB's key rate since
the currency's start in 1999. That money-market
rate was 2.17 percent yesterday.

The ECB last week left its main rate unchanged at
a six-decade low of 2 percent, while warning
employers and labor unions not to use rising oil
prices as an excuse for wage increases that could
fuel inflation.

Still, highlighting a "worrisome" inflation outlook,
the central bank weighed its first interest-rate
increase in four years, earning a rebuke yesterday
from Belgian Finance Minister Didier Reynders.

"It's not the indispensable orientation to go toward
a rise in rates," Reynders said. "When you discuss
a cut, that's another thing."


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