Euro trades as high as $1.4028 for first time since late January on talk of ‘currency war’

By Greg Keller, AP
Thursday, October 7, 2010

Euro briefly above $1.40 amid currency war fears

NEW YORK — The euro struck an eight-month high against the dollar Thursday as worries deepened that conflicts among major nations over currencies could threaten a global economic recovery.

World financial officials gathered ahead of weekend meetings of the International Monetary Fund and the World Bank warned that a currency spat over the value of China’s yuan could set off a wave of moves by central banks to weaken their own currencies.

The U.S. alleges that China is still keeping the yuan artificially weak, making exports from American companies more expensive in China, an increasingly important market, while Chinese goods are cheaper in the U.S. Critics have blamed the weak yuan for contributing to the loss of millions of manufacturing jobs in the U.S.

Chinese premier Wen Jiabao has retorted that letting its currency rise would cost China export-based jobs and could lead to economic and social turmoil.

Other countries that moved to weaken their currencies this week included Japan and Brazil. Investors expect the U.S. to start buying up huge amounts of U.S. government debt later this year, which would likely drag on the dollar.

IMF chief Dominique Strauss-Kahn said in an interview published in Friday’s edition of the French newspaper Le Monde that China’s currency was “at the root of tensions in the world economy that are becoming a threat.”

China must speed up its currency appreciation “if we want to avoid creating the conditions for a new crisis,” he said, echoing comments made by U.S. Treasury Secretary Timothy Geithner Wednesday. The yuan has risen about 2 percent since mid-June, when China said it would allow more flexibility in the yuan’s exchange rate.

European leaders have also said they are are unhappy about currency tensions. On Thursday, European Central Bank president Jean-Claude Trichet warned that excess volatility in exchange rates has “adverse implications” for economic stability.

The euro broke briefly above $1.40 for the first time since February early on Thursday. In late trading in New York, it settled back to $1.3930, almost unchanged from Wednesday’s value of $1.3935.

The euro has shot up 10 percent since August, because investors perceive the ECB to be the one major central bank “fundamentally opposed” to additional stimulus measures that could cause rates to drop and prices to rise, according to UBS analyst Beat Siegenthaler.

The dollar also fell to fresh 15-year lows against the Japanese currency at 82.12 yen before settling up at 82.37, still down from 82.93 yen late Wednesday. The dollar hit its latest record low at 0.9556 Swiss francs before trading up to 0.9667 Swiss francs from 0.9608 late Wednesday.

The British pound dipped to $1.5878 from the $1.5896, while the dollar rose to 1.0183 Canadian dollars from 1.0099 Canadian dollars.

The slight rebound in the dollar, coming before a key report Friday on U.S. jobs, is not likely to last, said Bank of New York Mellon currency analyst Michael Woolfolk.

“Market players have every reason to come back next week and continue shorting the (dollar) in the absence of any substantive agreement in Washington on exchange rates,” he said in a note to clients.

Associated Press writers Greg Keller in Paris, Raf Casert in Brussels and Geir Moulson in Berlin contributed to this report.

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