European Central Bank’s Trichet set for quizzing as euro surges to eight-month dollar highs

By Pan Pylas, AP
Thursday, October 7, 2010

Markets await Trichet’s comments on strong euro

LONDON — European Central Bank head Jean-Claude Trichet faces a quizzing about the euro’s ascent to eight-month highs against the dollar when he holds his monthly press conference Thursday.

The markets will be interested to see if Trichet uses the opportunity to subtly decry the stronger currency’s effect on the eurozone economy — using one of his carefully crafted comments about exchange rates.

His standard retort to questions over the value of the euro is that he will say something when he has something to say, and analysts think this may be one of those times, given the debt problems and associated austerity measures facing many eurozone countries, notably Ireland and Greece.

“We suspect that Trichet will subtly hint that the European authorities would not be happy with taking the lions’ share of the dollar adjustment in the foreign exchange market,” said Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ.

“In circumstance when countries on the periphery of Europe are suffering under the extreme pain of austerity measures the ECB will need to be seen opposing what would be another source of pain for countries like Ireland,” he added.

A stronger euro hurts growth by making European exports less competitive on price.

Much of the credit to the stronger than anticipated economic recovery in the eurozone in recent months has been due to the euro’s sizable fall during the government debt crisis. That made exports from the eurozone, particularly out of Germany, more competitive in the international marketplace, contributing to the 1 percent quarterly growth rate in the second quarter.

However, exporters can no longer count on a cheaper euro — Europe’s single currency climbed Wednesday to a high of $1.3880, a level it hasn’t reached since early February, when the markets were getting increasingly jittery about the debt crisis afflicting Greece in particular. By mid-June, the euro had fallen to a multiyear low of $1.1878.

Though May’s $110 billion bailout of Greece and a subsequent backstop facility for other imperiled eurozone countries has helped to soothe investor concerns about a wave of government debt defaults, the euro’s return to favor since the middle of the summer has been mainly due to developments in the U.S.

Worries that the world’s largest economy was heading back into recession and mounting expectations that the Federal Reserve is poised to announce another batch of stimulus measures at its next rate-setting meeting in early February have piled the pressure on the dollar.

That pressure would have been partly offset were the European Central Bank planning to do something similar Thursday alongside its expected decision to keep its main interest rate unchanged at 1 percent.

However, there are few, if any, signs that the European Central Bank is planning to do anything more, putting it at odds with many of its counterparts around the world.

In fact, recent comments from a number of policymakers at the bank have suggested the complete opposite, especially with regard to its money market operations, as the eurozone economy has fared better than most, despite ongoing strains in the so-called periphery nations, such as Greece, Ireland and Spain.

Even if Trichet does decide to voice his concerns about the euro’s recent rally, analysts doubt it will have much of an impact given the seeming policy divergence between central banks.

“The ECB will not be too happy about the rapid appreciation of the euro, but unless it steps away from earlier suggestions of normalising euro money markets, any verbal intervention attempting to take the steam out of the euro will be short lived,” said Hans Redeker, global head of foreign exchange strategy at BNP Paribas.

Earlier this week, the Bank of Japan announced it was cutting its key interest rate to a range of zero to 0.1 percent and that it was planning a 5 trillion yen ($60 billion) fund to buy government bonds and other assets to prop up the faltering Japanese economy.

And the Bank of England, which also meets on Thursday, is also being widely tipped to announce an expansion of its stimulus program in the coming months. It has already injected 200 billion pounds ($318 billion) into the economy via the purchase of financial assets from the banks.

The Bank of England though is not expected to announce anything new on Thursday as it awaits the British government’s budget cuts later this month, while keeping its main interest rate unchanged at the all-time low 0.5 percent.

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