Bini Smaghi Says ECB Can Intervene in Currency Market
European Central Bank Executive Board member Lorenzo Bini Smaghi said the bank can intervene in the currency market if needed.
“Exchange-rate markets are prone to episodes of overshooting and undershooting,” Bini Smaghi said in a speech in Brussels today. “Public intervention — in the form of public statements or even outright interventions in FX markets - - may thus be warranted.”
Euro-area policy makers have expressed concern that the pound’s 13 percent slide against the euro in the past year could push the 16-nation bloc deeper into recession by undermining exports to its biggest trading partner. The region is already grappling with the worst recession since World War II as a collapse in global demand chokes foreign sales, prompting companies to scale back output and cut jobs.
The euro declined almost half a cent to $1.3506 and also weakened against the pound after Bini Smaghi’s comments were published.
While Bini Smaghi cited the International Monetary Fund’s view that the euro is “on the strong side of medium-term fundamentals,” he didn’t indicate the ECB is planning to intervene. Bini Smaghi said it may be detrimental for a country to devalue its currency to make exports cheaper.
‘Fuel Resentment’
“Using the exchange rate as an instrument to gain a competitive advantage over others may fuel resentment and stoke protectionist pressures,” he said. The question also arises whether the single market created by Europe’s monetary union “can function smoothly when the exchange rate is allowed — or even encouraged — to depreciate sharply health insurance quote.”
The Swiss National Bank began buying foreign currencies on March 12, helping to push the franc down against the euro. Before the move, the franc had appreciated 8 percent in six months, neutralizing interest-rate cuts and weighing on exports. Since the SNB’s announcement, the franc has lost about 3 percent against the euro.
The euro’s relative strength against the dollar and the pound is partly due to the ECB’s reluctance to lower interest rates as aggressively as the Federal Reserve and the Bank of England.
The ECB has cut its benchmark lending rate by 3 percentage points to the 1.25 percent since last October. By contrast, the Fed, Bank of England and Bank of Japan have cut their key rates to almost zero and have started buying corporate and government debt.
“If market perceptions of the inadequacy of the euro area’s response to the crisis grow and the euro loses out to competitive devaluations elsewhere, pushing it higher, the zone’s ability to take advantage of a tentative global recovery will be impeded,” Deutsche Bank AG economist Mark Wall wrote in a report published on April 3. Deutsche Bank said a sustained 5 percent gain in the euro reduces gross domestic product by 0.5 percent to 0.9 percent a year.