EU officials complain about euro’s strength compared to yuan, but intervention not expected

By Gabriele Steinhauser, AP
Tuesday, October 5, 2010

EU pushes China on currency _ but action unlikely

BRUSSELS — Countries around the world are acting to keep their currencies from rising, in what one official calls a looming “international currency war.” Europe, however, stands out as unlikely to intervene and lower the value of the euro.

European leaders do complain publicly that the euro is too strong against China’s yuan — a key trade disadvantage for the 16 countries that use the shared currency.

But analyst say that displeasure probably won’t go farther than talk.

The European Central Bank remains skeptical in principle of interventions — actually buying and selling currencies to affect exchange rates, while European Union leaders have praised China’s commitment to purchase debt issued by troubled Greece — a measure that would support rather than lower the euro.

At a meeting Tuesday with Chinese Prime Minister Wen Jiabao — whose country’s lock on its currency is criticized for discouraging growth in its trade partners — three top euro zone economic officials called for “a significant and broad-based appreciation” of the Chinese yuan.

But they recommended no specific action though in recent weeks, the euro — unlike the US dollar — has risen sharply against the yuan and against the U.S. dollar after China’s June 19 announcement it would let market forces decide the value of the yuan. The euro traded at $1.3835 on Tuesday, after trading below $1.30 in early September.

European Central Bank president Jean-Claude Trichet, Jean-Claude Juncker, the head of the euro zone and EU Monetary Affairs chief Olli Rehn met with Wen on the sidelines of a 48-nation Europe-Asia summit.

Afterward, Trichet said he was committed to keeping major currencies floating freely despite calls from some economists that the ECB should help European manufacturers by keeping the value of the euro compared to the yuan in check.

A weaker euro would make exports to China cheaper and more competitive which would go some way to defuse worries about sovereign debt in some European countries that threaten an economic recovery in the region.

“Apart from complaining, there’s nothing (the ECB) would really want to do” about the value of the yuan, said Jane Foley, senior foreign-exchange strategist at Rabobank in London. The ECB is “not a great supporter of currency intervention,” she added.

Its unwillingness to act contrasts with steps by other central banks and governments to stabilize or devalue their currencies.

The Bank of Japan last month unilaterally sold yen against the dollar to prevent a further rise of its currency.

On Tuesday, it went further and cut its overnight call-rate target to a range of zero to 0.1 percent and set up a 35-trillion-yen fund to add liquidity to the market by buying government bonds and other securities.

Brazil on Monday doubled the tax on foreigners’ purchase of local bonds. That makes it more difficult for outside investors to buy assets denominated in reals, which pushes up its exchange rate.

The move came days after the country’s finance minister warned of an “international currency war” that could disrupt the global recovery as major trade nations cheapen their currencies. Lowering one’s currency means domestic companies goods get a price advantage in foreign markets — but can hurt other countries exporters.

In the U.S., the House of Representatives last week approved legislation enabling Washington to seek trade sanctions against China and other nations for manipulating their currencies to gain competitive advantages.

American manufacturers argue that China’s currency is undervalued by up to 40 percent against the dollar. The Federal Reserve has hinted at further asset purchases that could weigh on the dollar.

However, the euro zone is a special case, analysts say.

In contrast to the U.S.’s large trade deficit, the euro zone sports a trade surplus for the first six months of the year, undermining arguments that its currency is overvalued.

Also, one euro now buys fewer yuan than it did even a year ago amid worries over the solvency of debt-stricken Greece, Ireland, Spain and Portugal — the EU’s economic basket cases.

Indeed, Trichet and Juncker thanked Wen for Beijing’s commitment to buy Greek government bonds once the country returns to the markets — a move that would strengthen the euro.

“You can’t have both” — a lower yuan and Chinese support for euro-zone debt — said Daniel Gros, head of the Centre for European Policy Studies, a Brussels think tank. “This is economic nonsense.”

He suggests euro-zone governments, and the U.S. and China, pass legislation to ban the sale of sovereign debt to countries like China, which don’t allow foreign investors to purchase their bonds.

Such a move, said Gros, wouldn’t violate international laws on trade protectionism, and stem Beijing’s influence on foreign currencies.

Others, like Paul De Grauwe, professor of economics at the University of Leuven in Belgium, suggest the ECB should start buying large quantities of non-European government bonds to push up the value of foreign currencies.

“If the euro continues to appreciate against the yuan, we give them (China) for free a competitive advantage,” says De Grauwe.

But for now European big business seems satisfied with a hands-off approach.

“The perception that we get from our members is that the exchange rate is not a big problem for European recovery” right now, said Marc Stocker, director of the economic affairs department of Bussels-based lobbying group BusinessEurope.

However, he noted that China’s long-term growth will depend on building up domestic demand and if Beijing fails to build a more balanced economic momentum European business will also suffer.

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