ECB urged to rig currency market, just like gold market

Time for the ECB to Start Buying Dollars

By Lionel Laurent
Forbes magazine
Thursday, March 13, 2008

http://www.forbes.com/2008/03/13/bofinger-dollar-euro-face-markets-cx_ll...

LONDON -- The European Central Bank is well known for its reluctance to trim interest rates at a time when inflation is running rampant, despite heavy criticism that its hawkish stance is fueling the euro's rise. But now a key economic adviser to the German government has suggested that the ECB should directly intervene in the foreign exchange markets before the euro-dollar exchange rate gets out of control.

"The uncontrolled increase of the euro rate vis-a-vis the dollar threatens employment growth in the euro area," said Peter Bofinger, one of Germany's so-called "five wise men" appointed to advise the government on economic matters. He told Forbes.com that the ECB had an obligation to oversee growth, and that it had to act now -- alone if necessary -- to stop the euro from rising further.

The dollar hit a record low against the euro on Thursday, and dived below 100 yen for the first time in 12 years. Fears of an imminent recession in the United States are fueling a flight from the dollar, as well as the expectation that the U.S. Federal Reserve will continue to slash interest rates.

But although the European Central Bank has so far refused to budge from its own key rate of 4 percent, citing its primary goal of fighting inflation, Bofinger argued that the bank still had the power to tame the euro's rise. He said the ECB could intervene in the foreign exchange markets to buy more dollars, preferably in conjunction with other central banks like the Federal Reserve or the Bank of Japan.

"I think what would be needed is to find an agreement between those countries holding large dollar reserves," he said, citing a similar arrangement between central banks to limit the sale of gold reserves. He said such countries could include China, Japan, Russia, Germany, and big oil producers in the Middle East.

The European Central Bank refused to comment on Thursday. But the bank's president, Jean-Claude Trichet, has re-iterated his concern over "excessive exchange-rate movements" in an interview with Le Point, and noted with "extreme attention" the comments made by U.S. president George W. Bush in favor of a strong dollar.

Industry- atchers remain skeptical that the ECB will intervene directly to stabilize the exchange rate. First, the bank does not have an exchange-rate target. Second, the rise of the euro is consistent with economic fundamentals relative to the United States. Third, the ECB is expected to cut interest rates in mid-2008, which will help the dollar stabilize if the Federal Reserve goes on hold.

The ECB has intervened in the forex markets only once in its 10-year history. In 2000 the bank acted to bolster the external value of the euro, which it said at the time did "not reflect the favorable conditions of the euro area."

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