European authorities losing patience with collapsing dollar

By Ambrose Evans-Pritchard
The Telegraph, London
Friday, April 18, 2008

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/18/cneuro...

Jean-Claude Juncker, the European Union's "Mr Euro," has given the clearest warning to date that the world authorities may take action to halt the collapse of the dollar and undercut commodity speculation by hedge funds.

Momentum traders have blithely ignored last week's accord by the G7 powers, which described "sharp fluctuations in major currencies" as a threat to economic and financial stability. The euro has surged to fresh records this week, touching $1.5982 against the dollar and L0.8098 against sterling yesterday.

"I don't have the impression that financial markets and other actors have correctly and entirely understood the message of the G7 meeting," he said.

Mr Juncker, who doubles as Luxembourg premier and chair of eurozone financiers, told the Luxembourg press that he had been invited to the White House last week just before the G7 at the urgent request of President George Bush. The two leaders discussed the dangers of rising "protectionism" in Europe. Mr Juncker warned that matters could get out of hand unless America took steps to halt the slide in the dollar.

World central banks last intervened eight years ago -- with mixed success -- buying euros in September 2000 to support the fledgling currency through its worst crisis.

David Woo, currency chief at Barclays Capital, said the Europeans and Americans are talking past each other. Whatever the G7 wording, Washington is happy to watch the dollar slide. "They are not going to worry unless there is a knock-on effect on US equity or bond prices. So far that hasn't happened. There are no signs that the dollar decline has turned disorderly," he said.

European industry has managed to live with the high euro so far, but the damage of major currency shifts can take years to surface. "The moment will come where the exchange rate level will start to cause serious harm to the European economy," said Mr Juncker.

Louis Gallois, head of the Airbus group EADS, said his company is already taking dramatic steps to shift plant to the dollar zone. "The euro at its current level is asphyxiating a large part of European industry by shaving export margins," he said.

The European Central Bank revealed in its monthly report that foreign direct investment (FDI) into the euro zone has contracted by E269bn over the last two years. Foreigners are gradually winding down operations. This will have powerful long-term effects.

George Soros, the hedge fund baron who "broke" Europe's exchange system in the early 1990s, said yesterday that the euro could never anchor of the global system. "I don't think the euro can replace the dollar as the main world currency. The euro is not a truly attractive alternative," he said.

Mr Soros said the dollar would reclaim its crown eventually, but for now the financial crisis is leading to a flight from all paper currencies, causing a dash for gold, silver, and oil futures.

Otmar Issing, the ECB's former "high priest," said the single currency had started well but could face a "disastrous outcome" if the eurozone failed to embrace a flexible market system. "The 'single-size' monetary policy would simply not fit at all. In such a scenario, the single currency would risk straining cohesion," he warned in a new book, "The Euro."

This is already occurring. North and South have diverged further. While Germany and Holland have prospered under the strong euro, most of southern Europe and Ireland is in trouble. Current account deficits have reached 9.2 percent of GDP in Spain and may touch 15 percent in Greece. The European Commission's economists fear that the loss of competitiveness against Germany over the last decade may have passed the point of no return. At best, these countries face years of belt-tightening as their property booms deflate.

Silvio Berlusconi, Italy's newly elected premier, has called for a change in the ECB's mandate, proposing a dual mission akin to the US Federal Reserve's mandate to promote growth as well as fighting inflation. He has the support of France's Nicolas Sarkozy.

A key reason for the 30-percent rise in the euro agasint the dollar over the last two years has been the move by Asia central banks and Mid-East wealth funds to parking huge sums of newly acquired wealth in European bonds as an alternative to the dollar.

BNP Paribas said Asian surplus countries and commodity exporters have accumulated $1,160 billion in reserves over the last year alone. US Treasury data shows that only 19 percent of this was invested in dollar assets. This is a sharp break with past practice. A large chunk of the money was invested in euro-zone securities. The question is whether China, Saudi Arabia, and others, have now reached euro saturation.

* * *

GATA is grateful for financial contributions, which
are federally tax-deductible in the United States.