Tags: EU | Europe | Interest | Rates

ECB's Trichet: Currency Volatility Threatens Economic Growth

Thursday, 07 October 2010 11:13 AM

Excess volatility in exchange rates poses a risk to economic stability, European Central Bank president Jean-Claude Trichet warned Thursday, as the euro briefly topped the $1.40 mark for the first time in eight months.

Trichet's comments came after the ECB left its benchmark refinancing rate at 1 percent for the 17th consecutive month and hinted at his growing unease about the pace of the euro's rise against the dollar over the past few weeks.

The worry is that the euro's rapid appreciation will curb the competitiveness of European exports on international markets, with sharp movements more difficult for companies to adjust to.

"Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," Trichet said at the ECB's post-decision news conference.

He noted that central bankers and officials from major officials will have a chance to talk about currencies at their meetings in Washington D.C. in the next few days.

Though Trichet said he shared the stated view of U.S. policymakers that a strong dollar is in the interests of the United States, some analysts say the U.S. is actually operating a policy of benign neglect with regard to the currency — after all, a weaker dollar is good for American exports and would help shore up the recovery.

Trichet rarely says anything explicit about the euro's value so his comments generated a lot of interest among traders and currency analysts, and may have helped cap the euro's gains.

By mid afternoon London time, the euro was trading at $1.3940, markedly lower than the new eight-month high of $1.4028 it hit as Trichet was speaking.

The fall in the value of the euro in the first half of the year, when the government debt crisis exploded, has been credited for boosting growth in the 16-country eurozone. In the second quarter, the eurozone grew at a quarterly rate of 1 percent, with Germany benefiting in particular from a rebound in global trade.

Though cautioning about a still uncertain outlook, Trichet said the recovery should "proceed at a moderate pace in the second half of this year with the underlying momentum remaining positive."

He insisted the bank wasn't getting complacent.

"We don't declare victory, we don't say that now it's over," Trichet said. "We consider that we have to remain very cautious and very prudent."

Trichet said a number of Europe's banks still had to get their finances into shape and noted that the government debt crisis that nearly bankrupted Greece has not gone away. Ireland is currently in focus after another government bailout of the banking system.

Despite that backdrop, the euro has returned to favor since hitting its multi-year low of $1.1878 in June.

First, concerns about the pace of the U.S. recovery weighed on the dollar, followed then by mounting expectations that the Federal Reserve will announce new stimulus measures — in effect boosting the supply of money and lowering interest rates and yields of dollar assets.

Pressure from the prospect of new Fed stimulus action would be partly offset if the ECB took similar action — but there are no 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. Trichet pointed to an ongoing decline in banks' liquidity demands as a sign of the "process of normalization."

But he offered no new signal on when the ECB might wind up the remaining crisis lending programs, noting that "we are still in a mode of full allotment."

Earlier Thursday, the Bank of England 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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Excess volatility in exchange rates poses a risk to economic stability, European Central Bank president Jean-Claude Trichet warned Thursday, as the euro briefly topped the $1.40 mark for the first time in eight months.Trichet's comments came after the ECB left its benchmark...
Thursday, 07 October 2010 11:13 AM
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