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Euro Soars on Report EU Officials Not Yet Concerned by Strength

Posted by Joseph Trevisani on Feb 5, 2013 11:48:00 AM



     PARIS (MNI) - While the renewed strength of the euro is welcomed by
monetary authorities as a sign of returning confidence in the Eurozone,
the pace of the recent rise is less comforting, well placed Eurosystem
officials told MNI.

     At current levels, however, the euro appears unlikely to trigger
verbal intervention from ECB officials beyond a reminder of
international commitments to refrain from competitive devaluation.

     Within the ECB Governing Council, "the moderates have discussed the
view that the euro is a bit high against the dollar," said a senior
Eurosystem official.

     "But the dominant position, coming from the hawks, is that the euro
parity reflects the Eurozone's economic fundamentals," he added. "So
this is what we will be communicating to the markets."

     For another Eurosystem official, "The rise of the euro should
mainly be attributed to returning confidence in the Eurozone. The return
of LTRO funds should only have had an impact on the currency
appreciation in as far as it shows Europe's banking system is getting
healthier."

     "We are watching exchange rate developments closely and should the
euro continue to rise at the recent pace threatening to undermine the
recovery in the real economy, we might have to act," this source said.

     Another Eurosystem source sounded less concerned: "I don't think
we're at the point yet where exporters in the periphery are suffering.
Spanish exports seem to be holding up quite well. Some people are
talking about a currency war. I haven't seen that as an issue yet."

     The pull-back in the euro-dollar this week from Friday's peak above
$1.37 has not been enough to calm French officials, who began
complaining last week about the fallout for industry of an overvalued
euro. After the head of French employers group urged ECB President Mario
Draghi to send a signal to forex markets, President Francois Hollande on
Tuesday resounded the traditional French call for an overhaul of the
international monetary system.

     Even if French are not alone in their concern that the stronger
euro could impede economic recovery, Draghi is likely to stick to
references to G20 commitments to "market-determined exchange rate
systems".

     "No one likes it if others have a specific [FX] target, so we'll
continue to refer to that, and it applies to others to a lesser degree,"
said a senior Eurosystem source, without citing Japan or the US by name.

     Even before euro-dollar eased back towards $1.35 this week, this
source had suggested the market might be poised to shift gears:
"We've had the carry trade - betting that rates would stay low and the
euro would rise. But rates have been fairly resilient, although they
have risen very, very slightly at the ultra short end, with some
unwinding of short positions."

     "We know that there's lots of hedge funds and pensions funds still
sitting on the sidelines with cash and a lot of investors are looking at
getting back into the periphery, which has pushed up the euro," he said.
"These moves have to be matched by what's happening in the real economy
and that's not yet happening."

     "More recently there's been some unwinding and that may create
exchange movement in our favor," this senior Eurosystem source said.

     By dampening imported inflation, the stronger euro allows the ECB
greater leeway in setting interest rates without compromising its
price-stability mandate.

     "Inflation forecasts are already relatively low and the euro could
push it further notwithstanding slightly higher oil prices," said one
senior Eurosystem source. "We'll have to see how the rally in the market
progresses. I'd expect [inflation] to stay low for some months. It's a
bit early now to be making significant new estimates."

     "The euro's exchange rate is important insofar as it affects the
price stability objectives and assumptions," this source reminded.
"We're looking at the assumption that the exchange rate will push
inflati
 

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