ECB’s Trichet: “excess volatility” in exchange rates has adverse implications for stability

Thursday, October 7, 2010

ECB’s Trichet warns on currency volatility

BERLIN — The European Central Bank’s president has warned that excess volatility in exchange rates has “adverse implications” for economic stability.

Jean-Claude Trichet also said Thursday that he agrees with U.S. authorities when they say that “a strong dollar is in the interests of the United States.”

The euro broke above $1.40 for the first time in eight months as he spoke — more than 20 cents above multiyear lows in June.

Trichet said central bankers and officials from major officials will have an opportunity to discuss exchange rates during meetings in Washington over the coming days.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

BERLIN (AP) — The European Central Bank left its main interest rate unchanged at a record-low 1 percent for the 17th consecutive month on Thursday amid caution over the economic outlook.

The bank’s decision to leave its refinancing rate untouched, as it has since May 2009, was widely expected.

The 16-nation eurozone posted decent second-quarter economic growth. ECB President Jean-Claude Trichet said that the recovery should “proceed at a moderate pace in the second half of this year with the underlying momentum remaining positive.” But he cautioned that “uncertainty is still prevailing.”

The eurozone has seen a flare-up lately in fears over the debt troubles of Ireland in particular.

Still, that hasn’t troubled the euro, which has hit eight-month highs against the dollar on worries that the U.S. may be headed back into recession and expectations the Federal Reserve will announce new stimulus measures.

On Thursday, it nudged close to the $1.40 mark for the first time since February. That marks a turnaround from the 16-nation currency’s springtime tumble as markets fretted about the government debt crisis that spread from Greece — in mid-June, the euro hit a multiyear low of $1.1878.

Trichet can expect to face questions on the euro’s strength at the post-decision news conference.

A stronger euro could hurt growth by making European exports less price-competitive — the last thing the eurozone needs as it digs its way out of the debt crisis.

Germany’s export-driven quarter-on-quarter growth of 2.2 percent in the April-June period led the eurozone to growth of 1 percent.

The head of Germany’s main industry federation, Hans-Peter Keitel, said last week that he didn’t expect the exchange rate to “constitute a danger” to exporters if it stays roughly in its recent range. Still, companies won’t be keen to see the euro climb further.

Trichet’s standard retort to questions over the value of the euro has been that he will say something when he has something to say. Analysts think this could be one of those times, given the debt problems and associated austerity measures facing many eurozone countries.

Pressure from the prospect of new Fed stimulus action would be partly offset if the ECB took similar action — but there are no real signs that the ECB plans to do so.

In fact, recent comments from a number of policymakers at the bank have suggested the opposite, especially with regard to money market operations.

Earlier Thursday, the Bank of England has held interest rates steady at a record low of 0.5 percent for the 19th consecutive month as it waits for a clearer picture on economic recovery.

The bank also kept its 200 billion pound ($318 billion) asset-purchase program on hold — but pressure is rising for it to restart the so-called quantitative easing program to boost the money supply.

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