Translated material
Trichet strengthened the dollar
The ECB left the policy rate unchanged
The European Central Bank yesterday kept its base rate at 4% per annum, although many European politicians and business representatives called for it to be reduced, pointing out that the value of the euro was too high. However, according to analysts, statements by ECB head Jean-Claude Trichet will weaken growth euro in the medium term. Yesterday, the foreign exchange market already reacted to his speech: the euro exchange rate fell slightly against major currencies. The Bank of England also maintained its rate yesterday, but it is expected that it may be reduced before the end of the year.Most analysts predicted that the rate would remain the same - 4% per annum. This is its maximum value since August 2001. This year, the ECB raised the rate twice (in March and June), last year - five times (adding 25 basis points to it). This pace testified to the sharp growth of the European economy. Yesterday at a press conference after the ECB meeting, Jean-Claude Trichet warned that the risk of a slowdown in economic growth in the eurozone still remains due to uncertainty in the markets caused by the credit crisis. “But the forecast for 2008 confirms our main scenario, according to which GDP growth will be close to the potential trend,” Mr. Trichet said. However, he noted that this forecast could be affected by increased volatility in financial markets, reassessment of risk, concerns about protectionist pressure, as well as further increases in oil and commodity prices.
After such statements, analysts lost faith in the possibility of raising interest rates, and many began to expect a reduction. It seems that the European monetary regulator has decided to listen to the opinions of European politicians and business representatives, which have been heard more and more often lately.
On October 3, the president of Europe's largest business group, BusinessEurope, Ernest-Antoine Seyer, in a letter to the head of the Eurogroup, Jean-Claude Juncker, noted that “having exceeded the level of 1.4 dollars and strengthened against the yuan and the yen, the euro exchange rate has reached the threshold of pain sensitivity for European companies.” . He even called on eurozone governments to put pressure on the US, Japan and China to take action to strengthen their currencies, as the strong euro is hurting European businesses. On the same day, Italian Prime Minister Romano Prodi said that he was concerned about the strengthening of the euro and talked about this with German Chancellor Angela Merkel, who was also alarmed. The main supporter of the depreciation of the euro is French President Nicolas Sarkozy. He has long accused the ECB of creating favorable conditions for speculators and being overly concerned about inflation. Mr Sarkozy is calling on the financial regulator to focus on economic growth and employment and cut the eurozone policy rate to help exporting companies. The President recommends following the example of the United States, China and Japan, which are seeking to depreciate national currencies to stimulate economic growth.
However, the ECB leadership has always resolutely resisted interference in its policies. And at yesterday’s meeting, Jean-Claude Trichet showed that he continues to pay great attention to the fight against inflation: “Our monetary policy is ready to counter the risks of a violation of price stability in the direction of rising prices.” “The fact that Jean-Claude Trichet is not the first time insisting on the need to confront price risks convinces us of the following: the European Central Bank is not ready to abandon anti-inflationary policies that imply a high value of the euro,” said CMC Markets analyst Ashraf Laidi.
Foreign exchange market participants took Mr. Trichet's speech as a signal to sell the European currency. Against the backdrop of his words, the euro dropped to $1.4078 (before the start of the conference the rate was at $1.411). Against the yen, the euro fell from 164.5 to 164.02 yen.
“The comments of Jean-Claude Trichet, who emphasized during the press conference the importance of strengthening the American currency, contributed to the growth of the dollar,” notes financial analyst at Forex Club Alexey Trifonov. “Additionally, investor confidence that the US Federal Reserve will continue to ease monetary policy is diminishing.” Economic data also contributed to the weakening of the euro. The producer price index in the eurozone in August, as expected, slowed its growth and amounted to 0.1%. On an annual basis, it grew by only 1.7%, although economists predicted 1.8%, the expert emphasizes.
The Bank of England, as expected by most analysts, also kept its base rate at 5.75% per annum. “But recently published unfavorable economic indicators for European countries indicate that the deterioration of the economic situation in the region may lead to a reduction in interest rates by the Bank of England in the near future,” Mr. Trifonov said. The latest research from the British central bank, published last week, showed that companies could face tightening credit conditions due to the liquidity crunch.
According to the specialist's forecasts, next week the euro/dollar pair will remain in the range of 1.43--1.4, and the pound/dollar in the range of 2.02--2.05.