Trichet, U.S. Officials Reluctant to Stand in Way of Euro Rally
Jean-Claude Trichet and the Bush administration are showing little willingness to stand in the way of the euro's surge against the dollar.
The euro rose above $1.52 for the first time this week after the Federal Reserve signaled it will keep cutting interest rates and officials at Trichet's European Central Bank indicated they're reluctant to do so. With the rate gap widening, U.S. and European policy makers will struggle to persuade traders to bet against a weaker dollar.
“There was no official complaint when the euro went through $1.50, and that's going to make people think it was a green light,'' said Stephen Jen, chief currency economist at Morgan Stanley in London. Policy makers are silent because they “aren't convinced they can stop it and are afraid of failing.''
It may even help, spurring U.S. exports while also slowing European inflation. The risk is the euro appreciates too far, choking European sales abroad and pushing up the price of imports to the U.S. The currency has climbed 15 percent against in the past year, rising as high as $1.5239 yesterday.
Treasury Secretary Henry Paulson is sticking to his rhetoric on the dollar. He told an audience at the Economic Club of Chicago on Feb. 28 that the currency will rebound, and, in time, reflect the competitiveness of the U.S. economy. President George W. Bush said “we're still for a strong dollar.''
`Inherent Conflict'
“You'll see Hank trotting out his line more and more, but there's an inherent conflict here as the Fed wants to cut,'' said Jim O'Neill, chief global economist at Goldman Sachs Group Inc. in London. “If the dollar stopped falling now, they'd be very happy.''
Some recent remarks even exacerbated the currency's slide.
The dollar touched a record low after Fed Chairman Ben S. Bernanke told Congress on Feb. 28 that the decline is helping to narrow the trade deficit. A day earlier, Bundesbank President Axel Weber pushed the euro higher after saying traders should shelve bets on rate cuts.
The Fed has reduced its benchmark rate five times since September, to 3 percent, and Bernanke said it will continue to “act in a timely manner.'' By contrast, the ECB has left its benchmark at 4 percent since credit markets seized up in August easy quick payday loans.
The euro has advanced against the dollar in five of the past six years. The currency shared by 15 countries is up 67 percent since the end of 2001 and traded at $1.5179 at 5 p.m. in New York yesterday. The euro has strengthened 2.3 percent this week.
“We thought that an exchange rate of $1.45 against the dollar would be a real hurdle for the European economy to remain on track, and that proved not to be the case,'' ECB council member Nout Wellink told reporters in New York on Feb. 26.
Speed Matters
“We are seeing the best performance in years despite the exchange rates,'' Wellink said. “It's the speed of the change of the exchange rate that matters.''
Finance ministers from the Group of Seven nations will get their next chance to discuss the situation at April's meeting in Washington. The G-7 consists of the U.S., the U.K., Canada, Japan, Germany, France and Italy.
Their room for action may be limited in the absence of a coordinated rate policy, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman Inc. in New York.
“If you imagine intervention as being like a ladder, we're still on the first rungs,'' said Chandler. “The chances of coordinated intervention are slim to zero.''
The dollar has declined against more than just the euro. The Fed's broad dollar index, which compares it with the currencies of U.S. trading partners, has retreated in five of the past six years.
Inflation, Exports
The dollar's slide may carry benefits for policy makers on both sides of the Atlantic. With inflation in the 15-nation euro region running at 3.2 percent, the fastest pace in 14 years, a stronger euro may damp import prices. The weaker dollar will also boost U.S. exports, helping the world's largest economy cope with a housing recession that's hurting consumer spending.
“The ECB will see the strong euro as a blessing in disguise,'' said Lena Komileva, chief economist at Tullett Prebon Plc in London. For the Fed, a weaker dollar “will help narrow the external financing need and re-inflate the economy.''