In his strongest comments to date on the euro and dollar rate, European Central Bank president Jean-Claude Trichet, who is chairman of the G-10 central bankers, said that bankers were “not indifferent” to Europe’s concern over the “brutal” exchange-rate moves.
The rising euro has increased the pressure on European exporters, who have seen their profit margins erode as the euro has increased in value by 50 percent since February 2002. That raises fears the stronger currency could hurt an economic recovery that’s just beginning.
The absence of a common front on currencies from the Group of 10 meeting suggests that the U.S. is still unwilling to halt the fall of the dollar, which has amounted to 18 percent against the euro over the past year, analysts said.
In response, Europeans are now taking a stronger line, telling central bankers from the world’s largest industrial nations that they are concerned about sharp foreign exchange moves, while in Paris, French Prime Minister Jean-Pierre Raffarin said officials must act quickly to bring the euro-dollar into line.
Trichet, the chairman of the G-10 meeting, said foreign exchange risks were not part of the discussion at the semi-monthly health check on world growth, which the central bankers see as steadily improving.
“It was not discussed as a risk,” Trichet said after the talks in the Swiss city of Basel.
Analysts say that his comments raise questions about whether the Group of Seven finance ministers can draft a new currency accord at their next meeting in February in Boca Raton, Fla. The finance ministers are now almost certain to discuss the global tensions arising from developments in foreign exchange markets at the meeting.
Europeans are pressing hard to place the issue firmly on the table at the G-10. France and Germany have expressed fears that the soaring single currency will hurt the euro zone’s economic recovery, which depends heavily on competitive exports.
This hardening by Europe of its stance against the dollar’s dramatic drop took some steam out of the euro’s rally. The single currency mid-market rate slipped a full cent to $1.2799 after hitting a record high against the dollar at $1.2898 earlier last week. Last week’s consumer rate reached $1.35 but has since fallen to $1.32.
But analysts said the euro’s retreat may prove short-lived and only a breather after its heady ascent of more than 12 percent in the last few months, because the U.S. seems unconcerned by rapid currency moves.
“Europe would prefer that the U.S. express some interest in stabilizing the dollar,” Stephen Englander, chief currency strategist at Barclays Capital in New York, said last week. “But from the U.S. point of view, they simply don’t see it in their interest to do that. There is no downside for the U.S.”
For the U.S. administration, the dollar’s decline is something of a blessing. It temporarily softens complaints from U.S. manufacturers that they cannot compete with the flood of cheap imports. The euro declined 0.65 percent to $1.2805 last week, but the downside was capped ahead of key U.S. trade deficit and capital flow data, which is due this week.
“Last month, the capital flow data showed foreigners had turned net sellers of dollar assets for the first time in nearly a decade,” said Niall Dunne, economist at Ulster Bank. “This release hit the dollar hard last month, and it might well do the same this week,” said Dunne, who sees the euro’s mid-market level breaking the $1.30 level this week.