Europe urges tough line on dollar

Tony Barber and Ralph Atkins
Financial Times
Wednesday October 03, 2007

Eurozone policymakers will urge the US and other countries at the next G7 meeting to take a strong stance against exchange rate volatility in an effort to halt the dollar’s decline against the euro, European Union officials said on Tuesday.

Finance ministers of the 13-member eurozone plan to forge a common position in Luxembourg next Monday, 11 days before the meeting in Washington of central bankers and finance ministers of the Group of Seven leading industrialised countries.

European politicians and business leaders have issued increasingly loud warnings about the dollar’s decline since the euro rose above $1.40 on September 20 for the first time since its launch in 1999. The euro hit a high on Monday of $1.4281.

Jean-Claude Juncker, chairman of the eurozone finance ministers’ group, on Monday said that the euro’s rise “tends to worry us a lot” and that it was no longer acceptable that Europe was bearing the brunt of “the consequences of the existing global imbalances”.

Christine Lagarde, French finance minister, said in an interview with Les Echos: “I’d really like to hear again [US Treasury secretary] Henry Paulson saying loud and clear that a strong dollar is good for the American economy.”

The US has given no ­public signal yet as to what language it will accept on exchange rates in the communiqué to be issued at the G7 meeting.

Such communiqués must have the consent of all seven governments – Canada, France, Germany, Italy, Japan, the UK and the US – and Washington can count on UK support in resisting language that implicitly questions the role of currency markets in determining exchange rates.

The US is also keen to highlight the need for China to accept more flexibility in its exchange rate regime to address the issue of its vast current account surpluses.

In Europe, Jean-Claude Trichet, the European Central Bank president, has become noticeably more ­strident in recent days in emphasising the US’s interest in a strong dollar.

His comments may reflect ECB concern about fears of US inflationary pressures after the Federal Reserve cut its benchmark interest rate on September 18 by 0.5 ­percentage points to 4.75 per cent.

Although eurozone inflation expectations might remain unaffected, the US experience could strengthen the ECB’s determination to hold the line against eurozone inflation, which last month rose above its target of an annual rate of “below but close to” 2 per cent.

The ECB’s governing council meets in Vienna on Thursday, when it is expected to hold its main interest rate at 4 per cent. With eurozone growth showing clear signs of weakening and the global credit squeeze clouding the outlook, the chances of another ECB rate rise have all but disappeared.

While Mr Trichet’s comments after Thursday’s ECB meeting may acknowledge the eurozone’s changed prospects, he is likely nevertheless to keep a hawkish tone.

Speaking in Malta on Monday, Mr Trichet said he had “noted with extreme attention that the US Treasury secretary and ... the Federal Reserve have said a strong dollar is in US interests”.

Robert Barrie, European economist at Credit Suisse, said the combination of a strengthening currency and weakening economy was proving awkward for the ECB. Mr Trichet’s comments might have been “the start of attempts to embark on verbal intervention”.