Europe's Frustration Grows as Dollar Hits Another Low

By MARK LANDLER
New York Times
Published: December 8, 2004

FRANKFURT, Dec. 7 - Europe's financial policy makers issued their strongest warnings yet about the dangers of a swooning dollar, and the dollar promptly sank to a new low against the euro.

The latest currency swing, which came a day after statements from Brussels late Monday by European finance ministers and the European Central Bank, illustrates the extent to which Europe has become a bystander in a global devaluation of the dollar, the world's leading currency.

Europe's frustration that the euro is absorbing the bulk of this downward pressure has become palpable. Austria's finance minister, Karl-Heinz Grasser, said the European Union ought to "engage in a serious and intensive debate" with the United States over its policy toward the dollar.

"I think it is unacceptable that Europe is paying the bill for major imbalances" in the United States, Mr. Grasser said at a meeting of European Union finance ministers in Brussels.

The president of the European Central Bank, Jean-Claude Trichet, declared, "all major countries and economic areas must play their part more actively in reducing global imbalances." Mr. Trichet has described recent exchange-rate swings as unwelcome and even brutal.

Although the statements prompted a brief rebound of the dollar against the euro, the rebound later evaporated as traders reverted to their prevailing assumptions that the United States is ready to tolerate a weaker dollar, and that the European Central Bank is not ready to intervene in the market.

After falling to $1.339 in trading in New York on Monday, the euro bounced back to $1.346 - a record - on Tuesday. The dollar recovered somewhat in later New York trading.

The European Central Bank has been mum about possible intervention, though one of its governors, Axel A. Weber, president of the Bundesbank in Germany, said at his year-end news conference here that "interventions are a tool that are always available to central banks."

Still, currency traders remain skeptical that the bank will intervene, especially since it is not likely to gain the support of the Federal Reserve. So far, it has stuck to less and less effective statements of concern.

"Europeans were brought up in the fundamentalist tradition that interventions are bad," said Norbert Walter, chief economist of Deutsche Bank. "They are viewed as a waste of taxpayers' money."

Mr. Walter predicted that the euro would gallop past $1.35, which is viewed as the next psychological milestone. He said currency traders were determined to see the euro trade at least 25 percent above its equilibrium level versus the dollar, which would imply a rate of $1.40.

European leaders blanch at such rarefied trading levels because they fear the euro will price their exports out of the American market. Europe's economic recovery has been fueled mainly by exports, but there is evidence of a slowing in shipments from Germany and other countries.

The German chancellor, Gerhard Schröder, said in remarks broadcast by German television that the European Central Bank "must design its interest rate policies and its intervention policies in such a way that growth in Europe is fostered, rather than the opposite happening."

Mr. Schröder, who is visiting China this week, is getting a firsthand look at the vagaries of global markets. He has been able to celebrate the signing of a clutch of lucrative trade deals, including a 1 billion euro ($1.34 billion) deal for Chinese airlines to buy 23 Airbus passenger planes, and a 350 million euro ($469 million) order for Siemens to supply locomotives.

But Beijing's reluctance to let its currency, the yuan or renminbi, float against the dollar or other currencies is one reason the dollar's decline against the euro has been so swift and deep. The Bank of Japan and other Asian central banks have also intervened to curb the rise of their currencies.

Mr. Schröder, flush with deals for planes and for trains, has not pressed the Chinese leaders to change their policy.

Europe's problem, analysts say, is that it is the third person in a two-person play: the United States, with its ballooning budget deficit and trade gap with Asia, and the Asian countries, who are largely financing the American debt by converting their dollars into Treasury bills.

"The big drama is between the United States, on the one hand, and the emerging markets, on the other hand," said Daniel Gros, director of the Center for European Policy Studies in Brussels. "What can Europe do?"