Wednesday, November 29, 2006

As euro pushes higher, finance ministers hold steady

As euro pushes higher, finance ministers hold steady
By Carter Dougherty
Copyright by The International Herald Tribune
Published: November 28, 2006

FRANKFURT: European finance ministers struck a relaxed tone about the renewed strength of the euro Tuesday as it traded above $1.32 for the first time in a year and a half, signaling a tolerance, at least for now, of gains that do not appear to threaten the European economic recovery.

While Jean-Claude Juncker of Luxembourg, chairman of the Eurogroup of finance ministers of countries that use the currency, criticized "excessive volatility and disorderly movements" as being detrimental to business, he brushed off the euro's recent rise as "not a cause for concern."

"Should the upward trend of the euro to the dollar and the yen continue, it would be cause for serious concern at some point," Juncker said during a meeting of the ministers in Brussels. "But we have not reached that point yet."

The position struck by Juncker and other finance ministers - which echoes a formulation that policy makers around the world have used since a meeting of Group of 7 finance ministers in 2004 - appeared to isolate France, which has been a lone voice in the past week blaming the euro for punishing the bottom line of some companies, notably Airbus.

Finance Minister Thierry Breton of France urged "collective vigilance" at the meeting in Brussels, which came only days after the euro burst through the $1.30 level and showed signs of going higher. But he was drowned out by other ministers who waved off any notion of a threat by the euro to the European economy.

"It's nothing special at all," Finance Minister Karl-Heinz Grasser of Austria said, Reuters reported. "It reflects the strength of the European economy."

France - though not necessarily French industry - has often been at the forefront of European worries about the exchange rate, and the country is facing a presidential election next year in which economic issues are bound to take center stage. President Jacques Chirac and Prime Minister Dominique de Villepin have weighed in with comments similar to Breton's.

In theory, a stronger euro costs European exporters sales because their goods become more expensive abroad. But in reality this calculation is offset by a range of factors including profit margins, productivity and complex systems companies use to hedge against currency swings.

Nout Wellink, the head of the Dutch central bank and a member of the European Central Bank's rate-setting body, said he was "not concerned" by the euro's rise, and offered pointed words for Breton.

"The European economy is on a very strong growth trend," Wellink said, Reuters reported. "The French comments on foreign exchange are a Pavlovian reaction."

The International Monetary Fund offered similarly soothing words Tuesday, forecasting healthy European growth for 2007 and 2008 as it played down worries about exchange rates.

"In our view the euro is within the range of uncertainty of being fairly valued," said Michael Deppler, the IMF's European director, Reuters reported.

The euro has moved upward in recent weeks in response to speculation that the U.S. Federal Reserve will have to cut interest rates next year in response to an economy whose distressed housing sector could spark a recession. With the ECB likely to raise borrowing costs next year as European growth remains strong, the appeal of euro-denominated assets is rising - at the dollar's expense. (Page 18)

The Fed stopped increasing interest rates in September, in a bet that the cooling economy would bring down inflation without triggering a recession, and without forcing the bank to aggressively cut rates. Though he acknowledged the housing sector's weakness, Ben Bernanke, the Fed chairman, suggested Tuesday that nothing had happened that would alter that strategy.

"The deceleration in economic activity currently under way appears to be taking place roughly along the lines envisioned," he said in a speech in New York. That said, Bernanke acknowledged that "substantial risks" surround this outlook. And he said the housing sector would be a drag on growth into next year.

U.S. Treasury Secretary Henry Paulson Jr. reiterated on Tuesday the U.S. position on the dollar. "A strong dollar is clearly in our nation's best interests," he said. "I feel very good today about the strength of the U.S. economy."

Notably absent from the lineup of comments from European politicians on the euro's recent rise was Germany, the world's largest merchandise exporter. But the Bundesbank, in a report issued Tuesday, cautioned that the dollar risked a "sharp" decline as U.S. and European interest rates diverge, and the massive current account deficit remains near a record, Bloomberg News reported.

Thomas Mayer, chief Europe economist at Deutsche Bank in London, said that cost-cutting over the past few years, and a decade-long effort to relocate production around the globe had largely insulated German exporters from the euro's rise.

"Taken together, these developments create a much higher tolerance for currency appreciation in Germany than elsewhere," Mayer said.

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