European Central Bank President Jean- Claude Trichet said he opposes “disorderly” currency moves even as his reluctance to consider easier monetary policy helped push the euro to a nine-month high against the dollar.
“More than ever, exchange rates should reflect economic fundamentals,” Trichet told reporters in Frankfurt today after the ECB today left its benchmark interest rate at a record low of 1 percent. “Excess volatility and disorderly moves have adverse implications for economic and financial stability.”
The euro appreciated to $1.40 for the first time since February, extending its gain in the past month to 10 percent, as Trichet signaled little willingness to do more to support growth. By contrast, the Bank of Japan this week dropped its benchmark to “virtually zero” and expanded its asset-purchase program, while the U.S. Federal Reserve has indicated it may do more to prop up its economy. The Bank of England today maintained its stimulus and kept rates at a record low.
Trichet, who said he supports a “strong dollar” and called for a “gradual appreciation” of the yuan, will today fly to Washington to attend a Group of Seven summit that’s likely to be dominated by discussions about exchange rates and international trade. Brazil’s Finance Minister Guido Mantega said Sept. 27 that there’s already a worldwide “currency war.”
‘Mildest of Rebukes’
Trichet’s comment on exchange rates was “the mildest of rebukes,” said Ken Wattret, an economist at BNP Paribas in London. “We continue to view the contrast between the debate inside the ECB over what to do next and that within the Fed and other central banks as a green light for the euro to stay stronger for longer than the fundamentals suggest it ought to be.”
Chinese officials this week stiffened their opposition to allowing the yuan to appreciate against other currencies after meeting Trichet and other policy makers in Brussels. The dollar today dropped to a 15-year low against the yen and to a record low against its Australian counterpart.
Trichet is trying to shore up Europe’s economic recovery and help banks hurt by this year’s debt crisis without making financial institutions dependant on cheap ECB cash. While the ECB has phased out its 12- and 6-month loans, it still lends unlimited amounts in its weekly, monthly and three-month tenders, and has pledged to keep doing so into early 2011.
Trichet said there’s “absolutely no change” in the ECB’s stance from a month ago and it will continue to gradually phase out its non-standard liquidity measures.
“We’re not at all challenging the fact that we need the non-standard measures at the moment I’m speaking,” Trichet said. “There is consensus on that. Of course we have to make a judgment. We have a new rendezvous to decide what will have to be the new mode at the end of the year.”
Near-record borrowing costs for nations across the euro region’s periphery are making the ECB’s exit more difficult.
Irish 10-year bond yields soared to a record versus German bunds on Sept. 29 on concern the bailouts of Anglo Irish Bank Corp. and Allied Irish Banks Plc would overwhelm government finances. The Portuguese-German 10-year yield spread, which hit a record on Sept. 28, was at 400 basis points today, up from 88 basis points on March 10.
Trichet said the market “is not functioning correctly” and “concerns remain relating to the emergence of renewed tensions.”
‘Better Than Expected’
Still, the economy is showing few signs of slowdown after expanding at the fastest pace in four years in the second quarter. The International Monetary Fund yesterday raised its euro-region growth forecast for this year to 1.7 percent from 1 percent. In 2011, the economy may expand 1.5 percent instead of a previously projected 1.3 percent, the fund said.
Trichet said that while the euro region’s economic development was “obviously better than expected,” the ECB sees risks “tilted slightly on the downside.” Inflation will remain “moderate” this year and next, he added.
“We’re on a modest growth path,” Trichet said. “We don’t declare victory and we have to be very alert.”
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