---- by Christopher Anstey ----
WASHINGTON (AFX) - U.S.-based analysts discount the possibility of European Central Bank intervention to support the euro in the near term, noting that the U.S. Treasury remains highly unlikely to participate in such an action.
"Right now intervention is unlikely," said Matthew Higgins, senior international economist at Merrill Lynch, explaining that "one gets the sense that the Bush administration looks less favorably on interventions, (and) without coordinated intervention, it is unlikely to be successful."
Although the ECB is now clearly concerned about the weak euro affecting inflation rates and presenting an impediment to further monetary easing at a time of slowing growth, current conditions lack the confluence of factors likely to prompt an intervention, analysts said.
Recent ECB officials' remarks that "a strong euro" is a "strong interest" of the ECB are probably an attempt to put a floor under the euro's recent weakness, they said.
"It's more an attempt to set a floor, to get the markets to stop and pause, than a signal intervention is on the way," said Tim Duy, senior currency analyst at independent advisory firm G7 Group in Washington, DC.
The recent remarks by ECB President Wim Duisenberg and ECB Council members Jean-Claude Trichet and Ernst Welteke "are an admission of (the fact) that inflation is a problem now; they have hinted that the level of the euro is becoming a concern," said Jeremy Fand, global head of foreign exchange at UBS Warburg in Connecticut.
This concern also relates to ECB monetary policy, because to the extent that inflation is rising, the ECB will be restrained from cutting interest rates to boost euro zone growth, which is looking increasingly shaky.
The ECB as a consequence "would much rather have the euro strong" to help counteract inflation and provide room for further monetary easing, Duy said.
The statements are the latest in a series of efforts by European officials t o stop the euro's slide in recent months, analysts said. "The first stage was saying the U.S. economy was in bad shape, then it was 'the internal value of the euro (being more important than) the external value,'" Fand said.
Marc Chandler, chief currency strategist at HSBC in New York, added that after "complaining, the next step is intervention." However, market conditions now make it unlikely for an intervention to work, analysts said.
The euro's current weakness has not been driven by speculators and is not accompanied by the sort of high-level media attention seen last fall, which raised serious long-term credibility questions about investing in the currency, they noted.
"I don't think they are likely to intervene until (the euro's weakness) becomes page-one news in European newspapers," Fand said. Chandler added that "the euro is not down because of speculators. There is some speculation, but it's very moderate ... the odds of (an intervention's) success are very reduced."
This is in contrast to last September and November, when the ECB intervened first jointly and then unilaterally to support the euro. A confluence of factors, including widespread questioning of the longer-term European economic outlook, fears of Denmark's rejection of further European integration, and significant speculatory selling of the euro prompted the intervention last fall, Duy noted.
"We had traders treating the euro as a one-way bet," he said, in contrast to current conditions, in which "the markets are not all that short the euro."
To be effective, an intervention would also need joint participants, analysts said, but this is not likely in current circumstances.
"My guess is the (U.S.) is less than interested -- but they could probably get Japan to go along," Fand said.
Japanese officials voiced worries earlier this month over euro weakness against the yen, which was also driving dollar/yen higher through cross trading, analysts noted.
Bush administration officials, in contrast, have shrugged off the strength of the dollar and may be somewhat less inclined as a rule to participate in foreign exchange interventions, analysts said. After meeting with U.S. manufacturing representatives, who recently outlined their concerns about the dollar's strength in a letter to Treasury Secretary Paul O'Neill, O'Neill said the strong-dollar policy is unchanged.
"I know what the relative relationships are between currencies," he said in a television interview last week, explaining that "these relationships go up and down, and those who are well prepared (and) those who are on the leading edge -- they always survive, they always do well, they always prosper."
Duy at G7 Group said "so far (O'Neill) has been resistant to the broader calls ... to do something about the dollar" while Fand noted that the O'Neill Treasury is "definitely less internationalist (and) more domestic-focussed."
Analysts said this prediliction towards leaving currency markets alone comes from a more free-market bias among the key economic officials of the Bush administration.
However, HSBC's Chandler noted that "I can't think of any administration that has not intervened in foreign exchange markets," predicting this will happen "sooner or later, because currency markets are volatile (by nature)."
He said the Bush administration probably would have participated in last fall's coordinated intervention, "even if they would not have liked the idea."
At this juncture, then, it appears that the U.S. would only intervene with the ECB if the euro were to decline precipitously beyond current levels, analysts said.
Some analysts said coordinated intervention could be possible around the July 7 G7 finance ministers' meeting in Rome, or the July 20-22 G8 leaders' summit in Genoa, if the euro does slide rapidly beyond its historic low of 82 against the dollar.
"There's a window of opportunity around the summit," Chandler said, noting that the intervention last September came just ahead of a G7 finance ministers' meeting in Prague.
Divisions between the new U.S. administration and Europe on a wide variety of foreign policy and economic issues could ironically raise the chance of U.S. participation in intervention during this window, he added.
The Bush administration's policies of deploying ballistic missile defences, withdrawing from the Kyoto Protocol on the environment, and criticising an OECD initiative to crack down on so-called "tax havens" have raised objections among Europeans.
"If anything, (the U.S.) may be more likely to participate in intervention: it wouldn't cost us much and it would show us not to be a 'unilateralist cowboy'," Chandler said.
The euro is not likely to see such a dire depreciation, however, analysts concluded.
Fand at UBS Warburg sees euro/dollar as most likely to stay in a range in coming weeks as it is "finding a base maybe around 83." The single-currency probably does not have much lower to go because "every bad piece of news is already out there," including slowing euro zone growth, rising inflation, continuing communication gaffs from ECB officials, and Irish rejection of EU expansion plans, he said.