Jan. 8 (Bloomberg) -- The European Central Bank kept its main lending rate at 2 percent, the lowest in almost 60 years, as the euro's appreciation against the dollar threatened to undermine an economic recovery driven by export growth. The euro's 20 percent gain against the dollar over the past year has eroded earnings at European companies including Volkswagen AG. The currency's ascent to a record $1.2813 on Tuesday prompted politicians including Belgian Prime Minister Guy Verhofstadt to call for an ECB rate cut. The U.S. Federal Reserve's benchmark rate stands at 1 percent.
``The euro doesn't end the recovery, but it clearly slows its speed,'' said Olaf Wortmann, an economist at Germany's VDMA machinery industry association, whose members include DaimlerChrysler AG, the world's fifth-largest carmaker, and ThyssenKrupp AG, Europe's third-biggest steel producer. ``It hurts profits and is costing us some orders.'' Exports, which led Europe's return to growth in the third quarter, account for a fifth of the $9 trillion economy of the 12 nations sharing the euro, twice as much as in the U.S. Business confidence in Europe fell in December and growth in services slowed, signaling demand from consumers and companies in Europe isn't strong enough to offset slower export growth.
Trichet Briefing
ECB President Jean-Claude Trichet will brief the press on the reasons for the rate decision at 2:30 p.m. in Frankfurt. He may use the press conference to signal concern about the euro's gains, said 14 of 25 economists surveyed by Bloomberg News. The euro bought $1.2636 at 2:11 p.m. in Frankfurt. European stocks held gains and bonds remained lower. The Dow Jones Stoxx 50 Index rose 0.8 percent today to 2712.65. ``The speed of the euro's appreciation is a problem,'' said Thomas Mayer, chief European economist at Deutsche Bank AG in London. ``It squeezes profits and that means less investment and fewer jobs.'' European governments, under pressure to meet deficit targets they agreed to when the euro was introduced five years ago, are struggling to boost economic growth. Opposition demands that Germany's borrowing not swell further forced Chancellor Gerhard Schroeder to cut in half planned tax cuts for this year.
For U.S. President George W. Bush, the dollar's drop is helping boost sales and hiring for U.S. exporters in an election year. Given the spare capacity in the U.S. economy, the currency's drop and hasn't led to the acceleration in inflation that typically accompanies a weaker currency.
No U.S. Concern
``All the indications from the American side are that a weak dollar is not creating any great policy concern for them,'' said Irish Prime Minister Bertie Ahern today in an interview with Bloomberg News in Dublin. ``I don't see anything changing in the foreseeable future.'' Investors have scaled back expectations for an increase in ECB rates, interest-rate futures trading shows. The yield on the three-month Euribor contract for March has dropped more than a quarter point in the past two months to 2.09 percent. That compares with a three-month money market rate of 2.10 percent. The Bank of England, the first of the four largest central banks to raise borrowing costs since 2000, today left its main lending rate at 3.75 percent. The U.S. Federal Reserve may leave its main rate near a four-decade low of 1 percent ``for a while to come,'' Fed Governor Ben S. Bernanke said this week.
`One Eye on the Fed'
The ECB is unlikely to raise rates before the Fed because higher rates in Europe would make the euro more attractive for investors, pushing the currency even higher against the dollar, economists said. ``The ECB always has one eye on the Fed and another one on the exchange rate, even if it doesn't admit that,'' said Thomas Meissner, head of fixed-income research at DZ Bank AG in Frankfurt and author of a study on the relationship between ECB and Fed interest rates. Some economists, including Klaus Baader at Lehman Brothers, reckon the ECB may lower interest rates by March to help stem the euro's advance and reduce the difference between the cost of money in European and the U.S. The ECB forecasts an inflation rate of 1.8 percent for 2004, below its 2 percent limit, giving the bank room to lower interest rates if needed. The Fed has rejected the idea of an inflation target. Demand from abroad pulled Europe out of a second-quarter contraction. The U.S. will probably grow 4.4 percent this year, according to a Bloomberg News poll of 59 economists. China, the fastest-growing of the world's biggest 10 economies, will expand 8 percent, a separate Bloomberg survey showed.
Change of Tone?
The European Commission estimates the euro nations will grow 1.8 percent this year. Manufacturing, which accounts for a fifth of the region's economy, grew for a fourth month in December. German unemployment fell for a fourth month in December, the Nuremberg-based Federal Labor Agency said today. A statement from Trichet that he is concerned about the euro's increase would signal a departure from his stance on currencies since taking over from Wim Duisenberg in November. The former head of the Bank of France has stuck to a phrase that he is in favor of a ``strong and stable'' currency. Measured against the currencies of 13 major trading partners of the euro area, the euro has gained 12 percent in the past year, almost half its gain versus the dollar, and is trading at about the average of the nine years before its introduction in 1999, according to ECB data. The euro ``is essentially back where it started,'' ECB Chief Economist Otmar Issing said last month.
`Pain Everywhere'
European companies and politicians are more concerned. Volkswagen, Europe's largest carmaker, said on Monday its U.S. business probably made a loss last year and the slump is likely to continue in 2004. Volkswagen's operating profit from the U.S. fell 99 percent in the third quarter as the euro wiped out earnings generated in the U.S. European Trade Commissioner Pascal Lamy today said the euro is nearing a level where it may ``become worrying for European competitiveness.'' German Economics and Labor Minister Wolfgang Clement told reporters today the dollar's drop ``is a special risk'' to the economic recovery in Europe. The euro's appreciation is ``causing us pain everywhere'' in Germany, Michael Rogowski, the head of the BDI German industry federation, told reporters in Berlin yesterday. The ``pain threshold has been crossed long ago.''//www.bloomberg.com