Tags: Eurozone | currency | wars | ECB

WSJ: Eurozone May Pay the Price for ECB Staying Out of Currency Wars

Thursday, 31 Jan 2013 08:10 AM

By Dan Weil

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While central banks such as the Bank of Japan are working hard to depress their currencies, the European Central Bank has been a relative hawk, allowing the euro to gain.

But the result may be negative for eurozone economies, as a strengthening currency hampers exports, writes Wall Street Journal columnist Richard Barley.

The euro hit a 14-month high of $1.3587 Wednesday and has jumped 11 percent in the last six months. The easing of Europe’s financial crisis helped spark the move.

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“The problem for the eurozone is that, as with monetary policy, one rate may not suit all,” he writes. “Some eurozone countries need to rebalance toward exports. … And each individual country may have its own exchange-rate pain threshold.”

For France, that level may be $1.22, and for Italy it may be $1.16, thanks to their lack of competitiveness and flexibility, according to Deutsche Bank analysts cited by Barley.

But many currency experts expect the euro to continue its rally.

With the Federal Reserve announcing Wednesday that it will continue its easing policy unabated, and the government announcing a 0.1 percent decline in gross domestic product for the fourth quarter, they see little reason to buy the greenback.

“[W]e can expect the Fed to continue with their very accommodative monetary policy, and that's negative for the dollar," Michael Woolfolk, senior currency strategist at BNY Mellon, tells Reuters.

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