heinz, ECB meets thursday...
FRANKFURT, Germany (AP) -- The foundering euro, which sank to yet another low Tuesday, has struck a nerve with Europe's central bankers, suggesting they will prepare markets at Thursday's monthly meeting for an imminent interest rate hike -- if they don't boost rates then and there.
The European Central Bank's mantra has traditionally been to focus on controlling inflation and let the markets set the value of Europe's common monetary unit, the euro.
At last month's meeting of the bank's governing board, ECB president Wim Duisenberg confidently said the euro's weakness was no problem. And just last weekend, he said he was satisfied with the currency's performance.
That all changed Monday, however, when the euro hit what was then a new low of 96.75 U.S. cents, leading Duisenberg to say that its continuing slide poses a significant inflation risk. The same day, The Sun tabloid in Britain ran the screaming headline: ''EURO DEAD,'' along with an unflattering photo of Duisenberg gritting his teeth.
On Tuesday, the euro fell to 96.68 cents in early European trading before recovering a bit to rise above 97 cents.
While economists don't expect the ECB to raise interest rates Thursday, they say it's time for the bank to dramatically change its tone.
''It will start talking tough,'' said Klaus Thoma, chief economist at Deutsche Bank. ''But if they raise rates, it would be seen as a knee-jerk reaction to the euro's weakness and it could look bad coming just one day after the U.S. Federal Reserve is expected to raise its interest rates.''
The Fed, which also is worried about a resurgence of inflation, began a two-day meeting in Washington on Tuesday and was expected at Wednesday's conclusion to announce its fourth increase in short-term rates since June.
The ECB carefully regulates interest rates to keep inflation below 2 percent in the 11 of the 15 European Union countries that adopted the euro in January 1999.
Forecasts put this year's inflation rate at 1.5 percent, but the ECB warns that prices are creeping closer to this ceiling, driven mostly by higher oil prices, increased wage demands and now a currency which is losing its purchasing power.
The lower the euro, the more expensive it is for consumers in the 11-nation euro zone to buy goods from outside the region.
The ECB could move to cool off inflation by raising its main rate for lending to commercial banks to 3.25 percent from 3 percent as early as late February or March, Thoma said. By the end of the year, the rate could go as high as 4 percent, he predicted.
Raising interest rates tends to cool off an overheated economy by making it more expensive to borrow money. But it has the added effect of buoying the local currency by making returns more attractive on investments in bonds denominated in euros.
''The euro has depreciated more than 13 percent from a year ago,'' said Petra Koehler, an economist with Dresdner Bank in Frankfurt. ''We already have an inflationary impact.''
Koehler said a rate hike of one-quarter percentage point was imminent, but was unlikely to come on Thursday as the ECB had not given markets enough time to prepare.
The year-old bank -- which is struggling to establish itself as an independent financial entity on par with the Fed -- also doesn't want to give the impression it is mimicking its American counterpart.
The U.S. success story is part of the problem, said Commerzbank economist Peter Dixon. The euro's demise is not so much a sign of the European economy's weakness, it's a sign of the American economy's strength, many analysts say.
As people scramble to invest in the United States, they are ignoring Europe and causing the euro to fall.
''The fundamental growth in the euro economy is reasonably well,'' he said. ''But the euro could sink to 95 cents before we see a significant turnaround.''
In the countries using the euro, the economy is expected to grow around 3 percent this year.
On Tuesday, however, the United States entered its longest economic expansion ever -- 107 straight months of growth, with 1999 marking the third straight year with annual growth of 4 percent or more.
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