Eurozone finance chiefs take euro surge in stride

BERLIN - Finance ministers from the 13-nation eurozone shrugged off the surging strength of the euro on Friday, keeping calm as their shared currency flirted with an all-time high against the dollar.

"I don't see any particular reason to be excessively concerned" about the euro's rise, said Luxembourg Prime Minister Jean-Claude Juncker as he arrived to head a meeting of eurozone finance ministers.

The ministers were meeting in Berlin as the euro hit the highest point since December 2004 and nearing its all-time record against the US currency of 1.3666 dollars.

The prospect of higher interest rates in the eurozone has helped drive the euro higher against other major currencies as many investors borrow in low interest rate currencies for higher-yielding euro-denominated investments.

However, Juncker sounded a note of caution for the second time this week about such so-called carry trades, warning: "The market should know that they are ill-advised when they take up one-way bets.

Bundesbank President Axel Weber sent a strong signal that the European Central Bank's interest rates will head higher in the coming months after lifting its key rate last month to a five-and-a-year high of 3.75 per cent.

"In the current economic environment, we can't yet sound the all-clear from a monetary policy point of view," Weber, who sits on the ECB's decision-making governing council, told the business daily Handelsblatt.

"There are price risks in the medium term and we will have to counter those," he said.

Despite the euro's current strength, the ministers were careful not to stray from the well-worn position of G7 statements that excessive exchange rate volatility is "undesirable".

"Our position is very well defined on exchange rates and and is always the same," said Spanish Finance Minister Pedro Solbes. "Our main preoccupation should be excess volatility."

Although a stronger euro inevitably has an impact on exports, many business leaders and politicians say that what is more important is how fast the currency rises.

"The euro has not appreciated brutally but slowly," said Juncker.

Nevertheless, the last time the euro reached such high levels against other major currencies in late 2004 and early 2005, its strength helped derail a nascent economic recovery in Europe.

"Markets are becoming increasingly worried about a replay of the economic scenario of 2004-2005," said economist Marco Kramer at Italian bank Unicredit.

"At that time, business sentiment weakened considerably and stopped the ECB... from starting its hike cycle," he added.

However, he was confident that a full repeat could be avoided this time because foreign demand for the eurozone's exports remained strong and because the euro's appreciation has been much slower than during the last run-up.

The eurozone ministers were due to be joined later in the day by counterparts from the 27-nation European Union for two-days of informal talks focusing in part on whether hedge funds need tougher surveillance or regulation.

"These are matters that we have to discuss in a practical and workable way and make sure that we maintain public confidence and at the same time have a good prudential regulatory framework," said Irish Finance Minister Brian Cowen.

The meeting's host, Germany, is trying to drum up support for tightening regulations on hedge funds during its current presidencies of both the European Union and the G7.

The ministers were also due to discuss value added tax fraud and better managing of public finances, two recurring themes of their regular meetings.

Agence France-Presse