ECB President Wim Duisenberg discusses euro FX policy in speech, 14 Jan. 1999:
"The international role of the euro and the ECB
In its monetary policy strategy, the Eurosystem deliberately does not specify a target for the exchange rate of the euro against the US dollar or the Japanese yen. Although it will always stand ready to exchange views with other central banks concerning the development of exchange rates, there are no explicit or implicit target zones for the euro exchange rate against non-EU currencies. The euro area is a large, relatively closed economy, similar in this respect to the United States. Pursuing a target for the euro exchange rate could easily jeopardise the maintenance of price stability. The level of interest rates required to sustain an exchange rate target may, in some cases, not be that which best serves the maintenance of price stability over the medium term. I might add that it may also conflict with the achievement of other domestic policy objectives. It could be very painful if it were necessary to raise interest rates in a recession in order to defend the exchange rate of the euro. Finally, it should be acknowledged that today we are living in a world with high capital mobility. Exchange rate arrangements that could be implemented thirty years ago may no longer be feasible. The required amount of foreign exchange reserves could simply be too large.
Within the Eurosystem's monetary policy strategy, the euro exchange rate is the outcome of current and expected economic policies and developments in both the euro area and elsewhere, and of the market participants' perception of these policies and developments. Supporting the Eurosystem's approach, the Ministers of Finance, who
are assigned ultimate responsibility for the exchange rate of the euro by the Maastricht Treaty, have agreed not to issue so-called "general orientations" for the exchange rate policy to the Eurosystem other than in clearly exceptional circumstances, such as when there is a substantial and persistent misalignment of the euro against other currencies.
However, the absence of a target for the exchange rate of the euro against major international currencies does not imply that the ECB ignores or is indifferent to the exchange rate of the euro vis-à-vis the US dollar or the Japanese yen. The exchange rate will be monitored as one of the indicators of monetary policy, within the broadly-based assessment of the outlook for price developments that constitutes one
pillar of the overall strategy. Nor does the absence of exchange rate targets suggest that these rates will necessarily be unstable or volatile. On the contrary, the pursuit of stability-oriented monetary and fiscal policies puts in place one of the major prerequisites for stable euro exchange rates. The Eurosystem's stability-oriented
monetary policy strategy is a significant contribution in this regard. Absolute stability of the exchange rate is, of course, impossible to guarantee. It would not even be desirable if, for example, the United States and the euro area were to go through business cycles that were not fully synchronised. This possibility cannot be ruled out, as even recent history has shown."
(for full text of speech: ecb.int |
