Euro stronger as ECB tightens up on debt

THE ECB’s decision not to increase the availability of debt to boost growthin the eurozone has resulted in the euromaking strong gains in recent days.

By late yesterday afternoon the euro was trading at over $1.40 to the dollar as ECB president Jean Claude Trichet made clear his beliefthat markets, and notgovernments, should determine international exchange rates.

Mr Trichet has taken a different view on the currency question with the Bank of Japan and China determined to allow their currencies to fall against the dollar.

A sudden dip in US output in quarter two has also resulted in increased speculation that the Federal Reserve will increase the flow of money to the economy in another bout of quantitative easing to boost growth.

That holds out the prospect of continuing lower interest rates until the first quarter of 2012.

As a result, the dollar continued to lose ground to the euro and other currencies yesterday.

With sharp differences of opinion between Europe and the US on monetary policy right now, the markets suspect that the euro will continue to make gains.

Bank of Ireland’s chief economist Dan McLaughlin said in a new report that the euro would end 2010 at around $1.38, adding it might ease back in the near term as investors worked out their investment strategies.

This week the Bank of Japan boosted its asset-purchase plan and the US Federal Reserve contemplated a similar line of action.

In a statement on Thursday following the ECB’s monthly meeting on interest rates Mr Trichet said that ECB policymakers are in the same mood as a month ago and for now remain committed to phasing out their unlimited lending program.

That stance pushed the euro to $1.40 for the first time since February and leaves it to shoulder the burden of what economists say is an international embrace of weaker exchange rates as nations try to boost exports.

The price Mr Trichet may have to pay is slower growth as Goldman Sachs Group and Credit Suisse Group warn the stronger currency is starting to hurt the European economy.

“The ECB is standing at the edge of the battlefield and is happily allowing others to fire on it without any sign of self-defence,” said Klaus Baader, co-chief European economist at Societe Generale in London.

A week after Brazilian finance minister Guido Mantega complained of a global currency war, Mr Trichet said that markets should set exchange rates and warned that disorderly movements in currencies can harm growth.

That set the tone for yesterday’s meetings of the International Monetary Fund and Group of Seven as more governments intervene to weaken their currencies and the dollar falls on speculation that the Fed will pursue more quantitative easing.