FEARS FOR EUROZONE IF US DOLLAR CRASHES
Fears for eurozone if dollar crashes
· ECB boss warns of future damage to export demand
· Poor US economic data adds to the pressure
Larry Elliott, economics editor
Wednesday May 17, 2006
The Guardian
The European Central Bank warned last night of the dangers to the world economy of a plunge in the dollar as the US currency came under renewed pressure on foreign exchange markets.
Christian Noyer, a member of the ECB's governing council, said a marked depreciation in the greenback would be bad for growth in the 12-nation eurozone and run counter to agreements made by the G7 industrial nations.
Mr Noyer's remarks, made in an interview on Reuters TV, came as a business survey in Germany showed that a stronger euro and higher commodity prices may already be hurting confidence.
The ZEW expectations index - a barometer of Germany's future economic health - fell sharply from 62.7 in April to 50 this month, its fourth consecutive decline. Analysts said Germany - the eurozone's biggest economy - had been boosted by strong demand for its exports, but that this trend would be jeopardised if the single currency continued to rise.
"The evidence since the euro's launch is that its movements affect economic activity in the zone with a lag of 12 to 18 months," said Stephen Lewis of Insinger de Beaufort. "Euro appreciation is storing up trouble for the future."
The weaker than expected ZEW index temporarily halted the slide in the dollar. It resumed its decline, however, after the release in Washington of data showing softness in the American economy. Core producer prices - an indication of the cost pressures facing US industry - showed a 0.1% monthly increase, while the number of new houses being built stood at 1.85m, 100,000 fewer than expected.
While foreign exchange dealers remain confident that the ECB will raise rates by at least a quarter point next month, the US figures prompted speculation that the Federal Reserve will pull back from raising borrowing costs for a 17th successive time at its June meeting.
By lunchtime in New York, the euro was trading at $1.2820 against the US currency, up from $1.2795 on Monday. Sterling moved up from $1.8793 overnight to $1.8820, taking its rise since the turn of the year to almost 10%. The pound held steady against the euro at €1.4680 and was close to a 10-month high when measured by its trade-weighted index against a basket of currencies.
Mr Noyer said he did not believe the euro's rise was the start of the sort of disorderly unwinding of global imbalances feared by some economists. Any such development would be counter-productive, he added.
"I exclude that kind of development. I don't think it would happen but if it were to happen it would not anyhow correct the imbalances, it would aggravate global imbalances. This would be worrying for world growth ... This is certainly not something which is hoped or wished for by any authority within the G7."
The euro is up almost 6% against the dollar since the start of April. "If we had big movements in the foreign exchange market which could hamper the economic growth in the euro area, it would run exactly contrary to what is deemed as necessary by the G7 to help rebalancing the global economy," Mr Noyer said.
· ECB boss warns of future damage to export demand
· Poor US economic data adds to the pressure
Larry Elliott, economics editor
Wednesday May 17, 2006
The Guardian
The European Central Bank warned last night of the dangers to the world economy of a plunge in the dollar as the US currency came under renewed pressure on foreign exchange markets.
Christian Noyer, a member of the ECB's governing council, said a marked depreciation in the greenback would be bad for growth in the 12-nation eurozone and run counter to agreements made by the G7 industrial nations.
Mr Noyer's remarks, made in an interview on Reuters TV, came as a business survey in Germany showed that a stronger euro and higher commodity prices may already be hurting confidence.
The ZEW expectations index - a barometer of Germany's future economic health - fell sharply from 62.7 in April to 50 this month, its fourth consecutive decline. Analysts said Germany - the eurozone's biggest economy - had been boosted by strong demand for its exports, but that this trend would be jeopardised if the single currency continued to rise.
"The evidence since the euro's launch is that its movements affect economic activity in the zone with a lag of 12 to 18 months," said Stephen Lewis of Insinger de Beaufort. "Euro appreciation is storing up trouble for the future."
The weaker than expected ZEW index temporarily halted the slide in the dollar. It resumed its decline, however, after the release in Washington of data showing softness in the American economy. Core producer prices - an indication of the cost pressures facing US industry - showed a 0.1% monthly increase, while the number of new houses being built stood at 1.85m, 100,000 fewer than expected.
While foreign exchange dealers remain confident that the ECB will raise rates by at least a quarter point next month, the US figures prompted speculation that the Federal Reserve will pull back from raising borrowing costs for a 17th successive time at its June meeting.
By lunchtime in New York, the euro was trading at $1.2820 against the US currency, up from $1.2795 on Monday. Sterling moved up from $1.8793 overnight to $1.8820, taking its rise since the turn of the year to almost 10%. The pound held steady against the euro at €1.4680 and was close to a 10-month high when measured by its trade-weighted index against a basket of currencies.
Mr Noyer said he did not believe the euro's rise was the start of the sort of disorderly unwinding of global imbalances feared by some economists. Any such development would be counter-productive, he added.
"I exclude that kind of development. I don't think it would happen but if it were to happen it would not anyhow correct the imbalances, it would aggravate global imbalances. This would be worrying for world growth ... This is certainly not something which is hoped or wished for by any authority within the G7."
The euro is up almost 6% against the dollar since the start of April. "If we had big movements in the foreign exchange market which could hamper the economic growth in the euro area, it would run exactly contrary to what is deemed as necessary by the G7 to help rebalancing the global economy," Mr Noyer said.
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