(September 1) – “It was supposed to be a show of steely toughness, an antidote to the chronic weakness that has plagued Europe’s single currency, the euro, ever since its debut in January 1999,” writes Edmund Andrews in today’s New York Times.
“But when the European Central Bank raised interest rates Thursday for the sixth time in less than a year, the euro continued to founder near its all-time low amid widespread fears that it will sink even lower. Indeed, more than at any time in the short history of the euro, many analysts view the central bank as not only weak but off balance in response to changes in the economic climate.
“‘They are behind the curve,’ said Thomas Mayer, a senior economist with Goldman Sachs in Frankfurt, who argues that the bank is getting tougher just as the European economic growth shows signs of getting weaker. ‘In April 1999, they reduced interest rates even though the economy already seemed to be taking off. We could very well be in a similar situation right now.’
“Alarmed in large part by what it called the ‘protracted depreciation’ of the euro, the European Central Bank raised its baseline interest rate by a quarter point Thursday, to 4.5 percent. In a brief statement, the bank said the euro’s weakness threatened to push up the cost of imported goods at a time when high oil prices — compounded by the fact that oil is priced in dollars — were threatening to ripple through the economy.
“But if the move was supposed to build confidence in the euro, it did not. Within minutes of the announcement, the euro slipped slightly to roughly 89 cents against the dollar. It fell further later in the day, settling at 88.78 cents — the lowest it has been quoted in New York trading.
“By any measure, the European Central Bank faces a devilish problem. The euro has lost nearly one-quarter of its value against the dollar since its introduction, and the biggest cause of that decline has been the United States’ magnetic draw on investment money from around the world.
“If the weak euro does indeed fuel inflation, its credibility and value in world markets will slip further. But if central bankers slow down economic growth in an attempt to avoid inflation, the euro could lose value as investors and corporations tilt even more heavily away from Europe and toward the United States.