FRANKFURT, Dec 18 - European Central Bank policy makers on Thursday showed no sign of concern about the euro's current strength, even as the single currency soared to new records for the fifth straight trading session. ECB governing council member Nout Wellink said that a further rapid rise could hurt economic growth in the export-dependent 12 nation single currency bloc, as it makes euro zone products more expensive abroad. But both he and ECB President Jean-Claude Trichet repeated the central bank's standard line that a strong and stable euro is in the interest of the bloc's economy.
The euro hit fresh records above $1.24 on Thursday, the fifth consecutive trading session in which it reached new life highs. It has risen more than 18 percent versus the dollar since end-2002, and 11 percent on a trade-weighted basis. "At the moment we are still within the bound of tolerance for the ECB...these comments are much more expressing a fear about the future, than a concern about the situation in the last few weeks," said Julian Callow at Barclays Capital. In a sign politicians are more worried, European Commission President Romano Prodi said further euro rises were undesirable, but that the ECB should shun currency intervention.
"I've no desire to see the euro appreciate because I think that we have already some difficulties," he said in an interview with Bloomberg News. Trichet signalled that he is not too concerned about the euro's level now, saying he was happy that both Europe and the United States are pursuing a strong currency policy. "I am rejoicing in that we are pursuing - not only on our side but on both sides of the Atlantic - long-term strategies that are aimed at delivering strong and stable currencies," Trichet told the Wall Street Journal Europe in an interview. "I noted that it had been recently confirmed by the U.S. authorities themselves," he added. Dutch central bank head Wellink chimed in, telling reporters that a strong euro is in the interest of the euro zone economy, when entering a Governing Council meeting on Thursday.
EURO IMPACTS ECB POLICY
But as a strong euro puts a lid on the outlook for both euro zone inflation and growth, the ECB cannot ignore the currency's rise, particularly if it keeps rising rapidly, analysts said. The 12 nation bloc will grow by some 1.6 percent next year and by 2.4 percent in 2005, while inflation would come in at 1.8 percent in 2004 and 1.6 percent a year later, the ECB said in its December projections for the euro zone economy. But these forecasts assume the euro standing at $1.17. "We are already several percentage points higher than that, so it is starting to be significant from that point of view," said Jose-Luis Alzola at Citigroup in London. "In the base case scenario they don't have a strong recovery by any means and it's an export-led recovery, so you are creating a risk on the only engine of growth," he added. Economists expect the ECB to leave interest rates unchanged at record lows until well into next year, and financial markets have also scaled back their bets that the central bank would soon tighten its monetary policy stance.
A stronger euro might give it even more reason to wait with a first move up -- or even lead it to lower cash costs. Barclays' Callow cited research showing that an eight percent appreciation of the euro on a trade-weighted basis would lower both inflation and growth by some 0.5 percentage point in the year after it occurred. In a first sign the ECB might be considering to step into markets to stop the euro's rise, Chief Economist Otmar Issing said earlier this week the ECB could intervene if it wanted, a comment that Trichet echoed in Thursday's newspaper interview. But for the moment, policy makers would be reluctant to step into the market, Barclays' Callow said. "I think the ECB is caught between a rock and a hard place. It doesn't want to intervene because intervention is something that it is philosophically opposed to." By intervening into markets, the ECB also risked much loathed political mingling, as the ECB and politicians share a joint responsibility over the exchange rate, he said.//