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EU Policymakers Wary of an Overvalued Euro

By , Money Morning •

By Jason Simpkins
Associate Editor

The euro failed to extend its run of record highs versus the U.S. dollar Tuesday, as policymakers in Europe voiced concern over the currency's strength.

The euro has gained 3.5% on the dollar in the past week, reaching a new high of $1.5275 Monday. It has climbed 16% versus the dollar in the past year, leading some European policymakers to suggest the European Central Bank cut interest rates in the face of inflation that has soared to a 14-year high.

"The problem with the euro is that the European Central Bank, which does a good job controlling inflation, is ultra-powerful," Dominique Strauss-Kahn, head of the International Monetary Fund, told European news outlet Le Monde. "There is no political counterweight in the shape of a real European finance minister charged with growth."

Strauss-Kahn's concerns were echoed Tuesday after a monthly meeting of E.U. finance ministers in Brussels. Representatives of member nations voiced their concern about the dollar's weakness and the euro's growing strength, even calling on the United States to tighten its monetary policy in a joint effort to rein the swelling discrepancy between currencies.

"What I wish is that we will see the U.S. authorities' attitude strengthening" Belgian Finance Minister Didier Reynders told reporters after the meeting, adding that the euro's strength "augurs a stronger collaboration" between U.S. and E.U. policy makers.

Treasury Secretary Henry Paulson reaffirmed the U.S. commitment to a strong dollar on Monday.

"A strong dollar is in our nation's interest," he told Bloomberg Television. "The long-term [U.S. economic] fundamentals are very solid and they're going to be reflected in our currency."

The euro's rise has become a threat to the region's exports, just as the United States teeters on the brink of recession. The European Commission on Feb. 21 cut its forecast for economic growth to 1.8%, down from the 2.2% pace predicted in November.

European consumer spending, which accounts for almost 60% of the economy, fell in the fourth quarter for the first time in six years, the E.U.'s statistics bureau in Luxemburg said Tuesday.

"In the present circumstances, I consider very important what has been affirmed and reaffirmed by the U.S. authorities, including the secretary of the Treasury and the president of the United States of America, according to whom a strong-dollar policy is in the interests of the United States," said ECB President Jean-Claude Trichet.

According to Jacques Cailloux, chief Eurozone economist at Royal Bank of Scotland Group PLC (RBS), Trichet was clearly responding to the currency overshooting, but his comments are not a signal that the ECB will act immediately or slash rates at its next meeting March 6.

"It's not a signal for intervention or a clear sign for policy easing just yet, but it may fast track the debate on the ECB's Governing Council about a rate-cut," he told Bloomberg.

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