European finance ministers clashed over the threat posed to the region's economy by the stronger euro, with France's Thierry Breton expressing greater urgency than his Dutch and Austrian colleagues.
“I will call for collective vigilance” on currencies, Breton told reporters before a meeting of euro-region finance ministers in Brussels today. Austria's Karl-Heinz Grasser, on the other hand, said “the current exchange rate is not a problem for our exports.” The single currency rose to the highest since March 2005 today, extending a week-long rally and sparking concern among some economists the move will damp foreign sales of European goods just as global growth cools. The euro has gained on speculation the European Central Bank will raise interest rates faster than its counterparts in the US and Japan and was worth $1.3123 at 7:30 p.m. in Brussels. Earlier, it rose as high as $1.3178 to take its gain in the past week to 2.8%. Luxembourg Prime and Finance Minister Jean-Claude Juncker, who chairs tonight's meeting, said the euro is still “lengths away from the critical zone” that would disrupt growth and Gerrit Zalm of the Netherlands said “we shouldn't start worrying too early.”
Spain's Pedro Solbes, meanwhile, expressed concern about the pace of any appreciation, saying “rapid movements are not welcome.” Investors share that sentiment. Germany's benchmark DAX Index, which last week climbed to a five-year high, has dropped 2.7% in the last two trading sessions. The euro's appreciation has prompted some economists and executives to say the ECB should call a halt to its cycle of interest-rate increases next year. Barclays Capital says the recent move in the euro is the equivalent of a 17-basis-point increase in the ECB's key rate in terms of its impact on the economy. “I hope there is no pre-programmed and foreseeable rate increase month after month or quarter after quarter if the economy were to slow,” said Belgian Finance Minister Didier Reynders.
ECB President Jean-Claude Trichet, who says traders should view him as the sole spokesman for Europe's single currency, will also attend today's meeting. The central bank chief, who has said in the past he opposes “brutal” currency shifts, has so far said nothing on the euro's rally. Trichet has indicated the ECB is ready to take its key rate to 3.5% next month, which would be the sixth increase in a year. The ECB's governing council next meets on December 7. Traders have trimmed their bets for more rate increases next year since the euro's rally accelerated at the end of last week, futures trading shows. The implied rate on Euribor futures contracts for June closed at 3.85%, down from 3.91% on November 23. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999. (Bloomberg)