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Euro zone concerned with falling Yen and US dollar

Monday, February 26th 2007 - 21:00 UTC
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European finance ministers meeting in Brussels opened their monthly meeting Monday with European Central Bank President Jean-Claude Trichet, downplaying fears of inflation and calling for exchange rates to stabilize

No direct calls were made for the bank to avoid raising its key rate from the current 3.5% at its next meeting on March 8 but the ministers took issue with fears of a rise in inflation expressed by Trichet and his fellow central bankers. "Inflation is improving all over Europe" said Spain's economy minister, Pedro Solbes, noting that price rises long had been more marked in his country than elsewhere. In the euro area, the European Commission predicts inflation will fall to 1.8% this year from last year's 2.2% rate, putting it below the ECB's accepted limit of 2%. The ministers also rejected fears expressed by central bankers that wage hikes could cascade into the economy. German Finance Minister Peer Steinbrueck said he saw no inflation risk in the euro zone from current wage policy. "I don't see any inflation risk as long as wage policy is based on productivity," Steinbrueck said. Pay talks in Germany's key metals and engineering industry will gather force in early March, when the powerful IG Metall union is expected to seek a pay increase of 6.5% for its roughly 3.4 million workers. Currencies are the finance meeting's other hot topic. At last month's gathering, ministers called for Japan to do more to support its currency. The U.S. failed to give its support and the yen problem remains, and may even be worsening. The euro hit a new record high of Y159.63 last Friday, with some economists predicting the rate will reach Y160 soon, spurred by the Bank of Japan's gradual approach to rate increases, which is keeping carry trades lucrative. The dollar also took a beating Monday, weakening to two-month lows of around $1.32 against the euro. Both the yen and the dollar have lost almost half their value against the euro over the last five years.

Categories: Economy, International.

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