MercoPress. South Atlantic News Agency

Turbulence: strong € displaces concern with weak US dollar

As the Euro hits new highs against the US dollar conflicting signals seem to be coming from Europe as to how address the issue, but much will depend on what happens next Thursday when the European Central Bank and the Bank of England hold monthly meetings.

The European Commission reiterated on Monday concern about the strengthening of the European currency but European Central Bank President Jean-Claude Trichet said day that he has noted with great attention remarks by U.S. policymakers that a strong U.S. dollar is in US interests. Speaking to journalists in Malta, Trichet referred specifically to comments by U.S. Treasury Secretary Henry Paulson, and said he was not speaking about the last statement by Group of Seven industrialized nations. "I have said, and I repeat, that I've noted with extreme attention that the U.S. Treasury Secretary and ... the Federal Reserve have said a strong dollar is in U.S. interests," Trichet said. EC spokeswoman Amelia Torres said recent comments by Economic and Monetary Affairs Commissioner Joaquin Almunia expressing concern about the Euro rapid rise against the dollar were in line with G7 statements on foreign exchange. "If you read the regular declarations which the G7 has been making since 2003, you will recall ... they stress that it is undesirable to have excessive volatility of exchange rates, so that is the context for the text and I think developments of the last few days should be seen against that background," Torres said. "It is against that background that the commissioner said he was worried by the current rise in the Euro rate," she said. Torres also said a strong Euro had some positive effects for the Euro zone, such as offsetting the high price of oil, which is quoted in U.S. dollars. Later in the day European Commissioner Joaquin Almunia was quoted saying he fully supported Trichet's comments and was looking forward to the next G7 statement, due to be discussed later this month. Trichet's whose statement helped to contain the Euro advance over the US dollar and Japanese Yen, said global financial markets are going through a significant correction and a change in the assessment of risks, adding he was proud in the way the ECB had responded to correct the need for liquidity in money markets. "We're in the presence of a significant correction in the markets with a reassessment of risks following the episodes of high volatility and turbulence that have threatened in particular the normal functioning of the money market", said Trichet who is in Malta for the launching of the Euro as the common currency. "We're reaping the benefits of a monetary policy with great credibility which has anchored long term expectations at low levels", he underscored. According to analysts Mr. Trichet's comments are also an expression of concern about the degree to which the Euro has recently advanced versus the dollar. Excessive Euro strength could undermine Euro-zone exports, endanger jobs in the manufacturing sector and slow the region's economic expansion. However currency markets are waiting for the European Central Bank and Bank of England meetings later this week. Both central banks are expected to keep interest rate hikes on hold in light of turbulence in the global financial markets, but any comments made by ECB president Trichet on Thursday will be closely watched Last Friday, Luxembourg Prime Minister Jean-Claude Juncker, who heads the Euro Group of finance ministers from the 13 countries, indicated that the strength of the Euro would be a topic for discussion at the upcoming meeting of financial officials from the Group of Seven leading economies in Washington. Another key economic indicator markets will be looking at this week is the U.S. employment data on Friday, after the last non-farm payrolls data showed a significant decline and shot the dollar down. Some analysts also believe central bankers from Trichet to Canada's David Dodge may follow the US Reserve Chairman Ben S. Bernanke in an about-face, shifting toward supporting economic growth and away from fighting inflation. Economists are scrapping forecasts for higher interest rates in the Ero area, the U.K. and Canada as prospects for expansion weaken, and some even say inflation will soon recede enough to permit cuts. But the risk is that with oil prices above 80 US dollars a barrel, rising food costs and limited spare capacity, a tilt toward easier credit might end up fanning inflation. After the Fed on September 18 cut its benchmark rate a half percentage point, more than forecast, investors took out inflation insurance by shifting money from bonds into commodities and emerging-market stocks that tend to perform well when prices are accelerating. "The problem in cutting interest rates in the current environment is that markets respond by raising inflation expectations" said Joseph Stiglitz, Nobel-laureate economist at Columbia University. ''That's a limitation for monetary policy.'' Just a few weeks ago the ECB and Bank of England consensus was that they would only pause in their drive to push rates higher. That view was reinforced by anti-inflation rhetoric from central bankers themselves. Now, as credit-market turmoil in the U.S. spreads overseas, the pause looks more like a peak. "We've seen a major change in the field, where the larger risks today are on the side of credit crunch, financial contagion, economic slowdown, rather than the pattern of increased inflation,'' former U.S. Treasury Secretary Lawrence Summers, now a professor at Harvard University, said in a Sept. 27 interview. European exporters to the U.S. are suffering with an Euro in the range of 1.42 US dollars. Paris-based Total, Europe's third-largest oil company, calculates that every 10-cent drop in the dollar against the Euro shaves 1.1 billion Euros from its operating income. Canada's dollar last month traded at parity with the U.S. currency for the first time since 1976, prompting Montreal-based forest-products maker Tembec Inc. to shutter sawmills in British Columbia.