E.U. Worries About Dollar Intensify

BRUCE CRUMLEY / Time Magazine 3oct2007

PARIS — Europeans visiting the U.S. may be thrilled with the bargains they're finding thanks to the super-strong euro, but the American monetary policies that have permitted the dollar's continued decline are proving far less popular with economic officials across the European Union. In fact, shouts of protest are now rising from European economic chiefs demanding the U.S. take measures to reverse the dollar's slide.

This growing protest comes ahead of the Oct. 19 G-7 meeting in Washington, where European vexation over hands-off American attitudes toward the weakening dollar will be a main topic of discussion. Long a complaint aired primarily by the French, American willingness to allow the dollar to slip, which makes U.S. exports cheaper compared to foreign rivals, is now being denounced by a growing number of E.U. officials. Responding to the widening exchange rate gap from Luxembourg on Monday, Jean-Claude Junker — head of the Eurogroup of 13 nations who share the euro as their currency — complained about American indifference to dollar's slide.

"Europe cannot be the area of the world's economy to bear the consequences of others' inaction," Juncker told Reuters just hours after the dollar set yet another all-time record low against the euro of $1.43 late Monday. Juncker fears continued depreciation of the dollar will make exports from the euro zone too expensive for outside buyers. Such exports have played a major role in the E.U.'s recent economic recovery. "I will no longer accept that one considers it normal for Europe to accept at its own cost to manage the consequences of the existing global imbalances," he added.

Juncker's grumblings were preceded by similar criticism across Europe in recent weeks as the dollar dropped, including concerns voiced by German business leaders and economists who had long viewed a strong euro as a symbol of monetary rectitude. That crescendo of protest led France's Economy Minister Christine Lagarde to remind French economic daily Les Echos that Paris had long "sounded the alarm at the risk of irritating" more relaxed euro partners. She applauded signs that they had become "worried about the euro's level, and voiced their wishes to see concerted action" in response. Before the G-7 summit opens, Lagarde said she hoped to see "the entire Eurogroup adopt France's position."

Even if it doesn't, however, there's little chance U.S. officials will respond to the dollar's decline any time soon. David Naudé, euro-zone economist for Deutsche Bank in Paris, says there's absolutely no sign American authorities are ready to forsake the short-term trade benefits of what he calls "the policy of benign ignorance" toward the dollar.

In the absence of a reversal from within the U.S itself, Naudé says about the only thing the European Central Bank can do to undercut the dollar's slump is lower its own interest rates to create a degree of inflation to counterbalance any further rise in the euro's value. But that does nothing to undercut its appreciation outside the euro zone.

Along with many other economists around the globe, however, Naudé adds that letting the dollar's value decay in the medium and longer term will send a terrible message to foreign investors about the U.S. economy as a whole. "In wider terms, the dollar reflects the richness of the American economy, and a cheapened, sliding dollar will eventually send the same economic image out abroad," Naudé says. That could influence the foreign banks and give investors injecting $3 billion worth of capital required every day to keep the U.S. economy growing second thoughts about where they place their money. Conversely, a cheap currency reflecting a cheap economy, Naudé remarks, "could also leave U.S. companies very vulnerable to foreign buyers who figure they can pick up big American assets at a minimal price."

For those reasons, Naudé predicts U.S. policy will eventually move to buck up the dollar against the euro and other currencies once again. Just don't look for that to happen any time soon — or as a result of European pressure.

source: 7oct2007

Euro's Rise Is Set to
Spark Some European Fireworks

ADAM COHEN / Wall Street Journal 6oct2007

The euro's steady climb against the U.S. dollar is hurting European exports, prompting politicians to lash out at the European Central Bank, the U.S. trade deficit and China's tightly controlled currency.

These complaints will likely get a loud airing in Luxembourg on Monday at a meeting of finance ministers from the 13 countries that share the euro — a regular gathering known as the Eurogroup. ECB President Jean-Claude Trichet attends these meetings and this time he will have to deflect a drumbeat for interest-rate cuts.

French President Nicolas Sarkozy was a solitary, strident voice when the euro was at $1.30, but last week's move above $1.40 forced even the intervention-shy Germans to call for action. "The strong increase of the euro against the dollar worries me," German Economy Minister Michael Glos said last week after the currency reached a new peak.

The ministers' main task on Monday will be forging a common European stance before the Group of Seven meeting in Washington, D.C., later this month. Markets will look for signs that the finance chiefs want strong medicine, an ECB rate cut or even a coordinated effort to prop up the U.S. dollar.

The finance ministers likely will suggest the G-7 finance chiefs and central bankers issue a statement urging the U.S. to pursue a stronger dollar and calling for China to let the yuan float more freely. Previous G-7 statements have stressed only that volatile currency swings and global imbalances are bad for economic growth. The U.S. is eager to repeat its calls for China to untether the yuan, but isn't likely to acquiesce to language about the dollar.

So the European finance ministers may look for relief closer to home, pressuring the ECB to help ease the euro's rise. The central bank held its key rate at 4.0% on Thursday and its expected to keep rates steady through the end of the year to ward off inflation. The Federal Reserve, by contrast, cut its benchmark rate 0.50 percentage point last month to help steer the U.S. economy through the subprime-mortgage crisis.

Diverging interest rates are a key factor in the widening euro-dollar gap and while European politicians have tip-toed around the central bank — save for Mr. Sarkozy, who has demanded a rate cut for months — Monday's meeting could showcase growing strains in the ECB's relationship with national governments.

"We are in-de-pen-dent," Mr. Trichet said, stressing each syllable, when asked last month whether the central bank would bend to political pressure.

If Mr. Trichet won't cut rates, direct support for the dollar could be an option. When the euro languished near 80 U.S. cents in 2000, the ECB, the Federal Reserve and the Bank of Japan together bought billions of euros, propping up the currency.

Intervention is an unappetizing prospect. The U.S. and Europe would have a tougher time pressuring China to let its currency float freely if they don't practice what they preach. And intervention is no guarantee of success. The U.K. government lost billions in 1993 when it tried to keep the pound pegged to the mark.

But if the euro keeps climbing, something more than firm language will be needed. European exports — which become relatively more expensive as the currency rises — are showing signs of slowing, hurting everyone from French fashion houses to German auto makers. Europe's economic recovery, long-awaited and still shallow, could be in peril if the trend persists.

source: p.A2 7oct2007

EU Banks Forecast No Improvement in Funding

Further tightening of lending standards expected, ECB survey finds

SIMON KENNEDY / MarketWatch 5oct2007

LONDON — European banks don't expect to see any improvement in access to wholesale funding over the next quarter and will further tighten their lending standards following the credit market crisis, according to a European Central Bank survey published Friday.

The quarterly survey, which was brought forward by a month due to the market disruptions, showed "wholesale funding market access is not expected to become easier over the next three months, although there are some differences according to funding sources," the ECB said.

Not surprisingly, the hardest source of fund-raising has been through the securitization of home loans, where over 80% of banks who responded said their activity has been hampered. Roughly the same number expected difficulties to continue in the fourth quarter.

In contrast, over 70% of banks said their attempts to raise money in the very short-term money market were basically unaffected.

Difficulties in accessing wholesale markets will also reduce the amount those banks are willing to lend or the margin they will lend at.

Almost 90% of banks that use securitization as a funding source will cut the amount they lend, the survey found.

The ECB's survey came after it kept interest rates on hold at 4% Thursday. Announcing that decision, the bank said it needs to gather more data on the subprime crisis' impact on the wider economy.

Back with the survey, the ECB found loans and credit lines to enterprises have been tightened more than those to households.

"Banks expect for the next three months more tightening of credit standards, not only for M&A and corporate restructuring related loans, but also for loans financing fixed investment," the ECB said.

For example, just under 50% of banks reported they had tightened their standards on approving loans for acquisitions and restructuring in the last three months. But more than 60% said they expect to tighten those standards over the next three months.

source: 7oct2007

European Central Bank Holds Firm at 4%

Credit crisis spells downside economic risk; inflation still a concern

SIMON KENNEDY / MarketWatch 4oct2007

LONDON — The European Central Bank kept interest rates on hold Thursday, saying it needs more data on the wider impact of the credit-market crisis before it can draw any conclusions for monetary policy.

The ECB, which sets interest rates in the 13 countries that use the euro as their currency, kept its key rate at 4%, in line with expectations.

During a press conference after the decision, ECB President Jean-Claude Trichet said that the central bank's baseline scenario for economic growth remains unchanged but that the risks to this projection have moved to the downside due to the credit crisis.

Inflation risks, on the other hand, remain on the upside, Trichet said.

One significant omission from his statement was any mention of policy being "on the accommodative side." Instead he said the bank's monetary policy "stands ready to counter upside risk to price stability."

David Brown, chief European economist at Bear Stearns, interpreted the change in language as an indication that the bank's tightening policy has ended.

"We think ECB rate policy perceptions are in transition and the pendulum is swinging from tightening to easing, and away from inflation risks to slower growth concerns over the longer term," Brown said.

"The ECB may drag its feet on cutting rates, but almost as clear as day following night, the next move in ECB rates should be a cut next year," he added.

Economists at Danske Bank said the ECB's statement was less hawkish, but they argued the change was relatively small.

"Overall, the statement suggests that the council is still biased toward tightening of policy as it still sees the same number of upside risks to price stability," Danske Bank said in a note to clients.

"Also, the statement suggests that the council is still in a wait-and-see mode, and has not decided yet on the future policy course," it added.

Inflation above target

Inflation in the euro zone rose to 2.1% in September from 1.7% in August. The rate topped the central bank's 2% target for the first time in over a year.

Trichet said he expects a "hump" in inflation over the next few months from the impact of rising energy prices, before price growth moderates in 2008.

For 2008 as a whole, inflation should average around 2%, he added.

Earlier Thursday, the French statistics office lowered its forecast for France's economic growth this year to 1.8% from 2.1%, citing the effects of the recent financial crisis.

French gross domestic product probably grew 0.7% sequentially in the third quarter and could grow 0.5% in the fourth quarter, assuming the effects of the credit crisis remain moderate. See full story.

Trichet said he fully accepts that risks for the economy are on the downside, adding that more data are needed.

"In view of the only limited range of new economic data that have become available since our meeting in early September, particular caution needs to be exercised when assessing any potential impact of the financial market developments on the real economy." Trichet said.

Among the limited data released since the ECB's last rate decision, the euro zone's purchasing managers index fell to a reading of 53.2 in September from 54.3 in August. See more global markets coverage.

European markets remained mixed after the ECB's decision and Trichet's comments, with the German DAX 30 index falling 0.3% and the U.K. FTSE 100 index moving up 0.4%. See Europe Markets.

Trichet also noted that he appreciated comments from U.S. officials about the importance of a strong dollar for the U.S. economy. The euro edged lower against the dollar, falling 0.2% at $1.4077. It hit a high over $1.42 earlier in the week, raising some concerns over the impact of a weak dollar.

Foreign-exchange volatility can be very counterproductive to the global economy, Trichet added.

Simon Kennedy is the City correspondent for MarketWatch in London.

source: 7oct2007

A Good Bet For the Euro/Dollar Parity

New Europe i.750, 6oct2007

The expensive Euro is here to stay. This seems to be the conclusion from what happened last week in international money markets, where the American money made only very limited gains on the prospect of Euro interest rates remaining unchanged on October 4, as it turned out. The European Central Bank at that day’s gathering of its board of directors did not touch the basic Euro interest rate.

This does not mean, however that the ECB has abandoned its policy of vigilance vis-a-vis inflation dangers, and this is exactly what Jean-Claude Trichet said when presenting the decision of the central banking institution to the press. The wording though that Trichet used in the press conference was interpreted that, over the past weeks, the ECB was worried about inflation, but now it is highly interested in economic growth too.

It was high time that the announcement issued by the bank did not contain, after two years, the usual phrase that the monetary policy is not accommodating. This means that the ECB considers that interest rates have reached a ceiling and do not any more facilitate economic growth. The idea behind it is that lower interest rates help the economy grow, while more expensive money does not support economic development.

With this little economic theory we can now explain that what Trichet meant, with this announcement, is that interest rates can equally go down as well as up. It was the first time after two years that the ECB left open the possibility of Euro interest rates going down. It was high time that the bank did that. The Eurozone business community is now not alone in strongly complaining for expensive home money, not only in terms of interest rates, but more so in the front of its parity with the American dollar.

Apart from that, German employers and the UNICE, the EU business sector association, political leaders of the three main Eurozone exporting countries, Germany, France and Italy have now joined their voices with French President Nicolas Sarkozy in asking the ECB to use more accommodating monetary policies. For some time now, Europe has been worried that the Euro would reach the 1.50 mark against the dollar, making European imports into the United States more expensive.

On the face of it, it seems this message has reached the bank. The independence of the central banking institution is one good thing, but economic growth is a better prospect. As things stand now, it is obvious that the prospects for a more relaxed monetary policy are open. But this does at all mean that the ECB will rush to reduce interest rates. On the contrary, the expensive Euro, both in terms of interest rates and its dollar parity, will continue at the present rate. It is a good bet to predict that the Euro/dollar relation will continue for the next six months to oscillate around the present 1.40 benchmark.

source: 7oct2007

European Bonds Fall in Week After U.S. September Payrolls Data

ANCHALEE WORRACHTE / Bloomberg News 6oct2007

European government bonds posted a weekly decline after a report yesterday showed the U.S. economy created more jobs than expected last month, weakening the case for further interest-rate cuts by the Federal Reserve.

Bonds dropped after U.S. employment accelerated in September and revised figures for August showed an unexpected increase, easing concern the economy was headed toward recession. European debt rose before the release of the report, pushing two-year yields to a three-week low, on speculation the European Central Bank may not be able to raise interest rates further as the credit-market turmoil threatens to hurt the economy.

``The report gave the market an impression that perhaps the U.S. economy is not in such a bad shape as some people thought, and the Fed is now less likely to cut rates again soon,'' said Kornelius Purps, fixed-income strategist at Unicredit Markets & Investment Banking in Munich. ``I'm quite surprised at the magnitude of the revision for last month.''

Ten-year German yields rose 2 basis points on the week to 4.35 percent as of 4:07 p.m. yesterday in London. The price of the 4.25 percent bond maturing in 2017 fell 0.13, or 1.3 euros per 1,000-euro ($1,415) face amount, to 99.19.

U.S. payrolls grew by 110,000 after a revised 89,000 increase in August, the Labor Department said yesterday in Washington.

Treasuries Outperform

U.S. Treasuries underperformed German bonds this past week on speculation the Fed can now afford to wait and see if it needs to cut borrowing costs again. The extra yield investors earn for holding 10-year U.S. notes over equivalent bunds rose to 25 basis points yesterday from 22 basis points on Oct. 4.

The spread, or difference in yields, between two- and 10- year bonds was little changed yesterday at 33 basis points, near the widest in six weeks and up from 17 basis points in mid- September.

The ECB kept its benchmark rate unchanged at a six-year high of 4 percent this past week, in line with forecasts. ECB President Jean-Claude Trichet said there are ``downside risks'' to economic growth, and refrained from describing the interest rate as ``accommodative.''

``The ECB no longer deems monetary policy as accommodative, and this is a clear departure from a tightening bias,'' said Aurelio Maccario, chief economist at Unicredit Markets & Investment Banking in Milan. ``We remain confident that the ECB will leave rates unchanged over the next quarters.''

Lending Conditions

The ECB said in a quarterly survey yesterday that European banks may make it harder for companies and consumers to borrow money in the next three months, as the slump in U.S. subprime mortgages increases credit costs and banks tighten lending conditions.

Any further decline in European bond prices may be limited by the strength of the euro, which has gained 7 percent versus the dollar so far this year. The common European currency reached an all-time high on Oct. 1, raising concern exports from the euro region are becoming more expensive. This added to evidence in economic reports in the last week of September that Europe's economy is already slowing.

``We're already seeing that sales of German exports are falling off drastically in the U.S.,'' Anton Boerner, president of the Berlin-based BGA wholesalers and exporters group, said in an interview in Seoul yesterday. ``I think we've stepped beyond the pain threshold.''

source: 7oct2007