The European Central Bank can tolerate the euro's appreciation against the dollar until the currency reaches $1.30, according to a person familiar with discussions of the bank's 18-member governing council. The economy of the 12 nations sharing the euro won't be endangered as long as the currency trades between $1.05 and $1.30, the person said. The range is a synthesis of academic research included in papers studied by the bank's council for several months and at policy makers' last meeting on March 4. ECB spokesman Niels Buenemann declined to comment.
The range is consistent with comments from policy makers. ECB President Jean-Claude Trichet first changed his tone on the euro at the bank's Jan. 8 press conference and four days later said he was concerned about ``brutal moves'' in exchange rates as the euro rose as high as $1.2899, according to EBS prices. The currency has dropped 4 percent since then. ``The verbal intervention has worked,'' said Oliver Plein, an economist at Deutscher Investment Trust in Frankfurt, which manages the equivalent of $57.5 billion. ``If momentum increases again and the euro rises above $1.30, the ECB will increase its verbal intervention. If that doesn't work, they would probably lean towards cutting rates.''
Welteke's Comments
The euro rose against the dollar today, trading at $1.2240 at 12:21 p.m. in Frankfurt, after Bundesbank President and ECB council member Ernst Welteke suggested the bank is closer to raising rates than to lowering them. ``The euro is now falling and the oil price is above $30 a barrel,'' Welteke told reporters in Berlin today. ``That would actually be a reason for us to consider raising interest rates. The ECB has a wait-and-see policy and must not react to day-to- day changes in indicators.'' The ECB has rejected calls from politicians including German Chancellor Gerhard Schroeder and French Prime Minister Jean- Pierre Raffarin to lower interest rates to stem the euro's appreciation. All 18 members of the ECB's council agreed at last week's meeting that the main overnight lending rate should be left at 2 percent, the person said. Trichet said that day borrowing costs are ``appropriate'' for the economy. The level of global demand is more important for the region's economy than the level of exchange rates, Bank of France Governor and ECB council member Christian Noyer said in an interview with French newspaper La Tribune today.
Slowing Down
``The global growth outlook is a very robust one,'' said Julian Callow, chief European economist at Barclays Capital in London. ``From the ECB's perspective, clearly the euro can be in a $1.20 to $1.30 range. I think we need to go to $1.35 before the ECB is ready to lower rates.'' There are already signs the euro's 11 percent gain against the dollar over the past year are slowing the pace of growth. Business confidence in Germany, Europe's biggest economy, fell in February for the first time in 10 months. In Italy, exports slumped 3.8 percent in the fourth quarter from the third. ``We continue to believe the euro's strength will undermine the recovery in 2004,'' said Robert Lind and James Carrick, economists at ABN Amro who today cut their 2004 forecast for euro region growth to 1 percent from 1.25 percent. ``It will depress export demand and profitability.''
`Danger Level'
Executives including Adidas-Salomon AG Chief Executive Officer Herbert Hainer and economists such as Hans-Werner Sinn, president of the Munich-based Ifo institute, have said $1.30 is the point at which the ECB should either sell euros or lower rates to stem the currency's advance. Juergen Strube, supervisory chairman of BASF AG, said last week that a euro at $1.30 would be ``reaching a danger level.'' Germany's IfW economic institute today lowered its growth forecast for the euro region, saying the currency's increase is denting export growth and slowing the recovery. The Kiel-based institute pared its prediction to 1.7 percent from 1.9 percent. The ECB remains optimistic that growth will accelerate this year, Trichet said at last week's press conference in Frankfurt. The bank sees growth quickening to 1.5 percent this year from 0.4 percent in 2003, according to a person who has seen the ECB's internal forecasts. The bank is working on an assumption for an average euro rate of $1.26 for 2004 and 2005, compared with the $1.17 forecast in December, the forecasts show.
ECB Optimism
``More recent indicators, including those from business and consumer surveys, point to moderate economic growth also in early 2004,'' the ECB said in its monthly report today. ``Both external and domestic factors give reason to expect a strengthening of the recovery through 2004 and beyond.'' Central bankers from the Group of 10 nations said Monday the global economic recovery is ``strengthening'' and Trichet said growth in some parts of Asia represents a ``powerful engine'' for the world economy.
Europe is lagging. Growth in the euro region slowed in the fourth quarter to 0.3 percent as exports increased at a 10th of the pace of the previous three months, the European Union's statistics office said last week. That compares with 1 percent expansion in the U.S. and 1.7 percent in Japan in the quarter. The euro's gains makes exports from the region more expensive and reduces companies' earnings denominated in dollars. Nokia Oyj, the world's largest mobile phone maker, and Alcatel SA, the world's biggest maker of broadband equipment, are among the companies to say the euro's gains hurt business. ///www.bloomberg.com