May 17, 2008

Europe becomes uncomfortable with strong euro

Xinhua reported that European Central Bank board member Mr Lorenzo Bini Smaghi defended the bank's role in the aftermath of a warning by European Union leaders over the relentless rise of the euro against the US dollar.

Mr Smaghi said that the European Central Bank's main task is to keep prices stable and avoid the effects of second round inflation, adding that exports have held up well in recent years despite the rise of the euro. His remarks came after EU leaders issued a rare collective warning at their summit.

Wrapping up a two day summit, leaders from the 27 EU member states made a last minute addition to their final conclusion which said that "Excessive volatility and disorderly movements in exchange rates are undesirable for economic growth. In the present circumstances we are concerned about excessive exchange rate moves.”

The warning came as the euro climbed to a series of new highs against the dollar. Up to Monday, the single currency of the 15 nation euro group had touched 1.5903 dollars in New York trading, the lowest level since it was introduced to world financial markets as an accounting currency in 1999.

Analysts said that the unusual warning underlined the nervousness among European politicians and business leaders about the euro's steep climb against the dollar and other currencies. It added that a strong euro is certainly a burden for European exporters, making their goods less competitive in the United States and other dollar linked markets.