And more good news for the markets...
Central Banks Move to Rescue an Ailing
Euro
By EDMUND L. ANDREWS and JOSEPH KAHN
PRAGUE, Sept. 22 —
Shaken by the relentless
decline of Europe's unified
currency, the euro, the European,
American and Japanese central
banks undertook a surprise rescue
attempt today to fight what they
called a threat to the world
economy.
Their move, announced as financial
ministers from the Group of 7
industrialized nations arrived here
in advance of a meeting Saturday,
was the first time in two years that
central banks had staged a
coordinated currency intervention
— and the first time ever that they
had done so in support of a
European currency.
The action also represented a shift
by the United States Treasury
secretary, Lawrence H. Summers,
who had consistently opposed
calls for intervention and as
recently as Thursday had
reiterated support for a strong
dollar. His comments were widely
interpreted at the time as ruling out
United States participation in any
attempt to strengthen the euro
against the dollar.
The banks bought billions of euros
with dollars, yen and British
pounds in the intervention, pushing
the euro's value up to 90 cents
from 85 cents. The euro later
slipped back to settle at 87.87 cents.
The currency had fallen below 85 cents from its initial price of $1.18 in
January 1999, a decline of almost 30 percent that disheartened euro
supporters, who had seen the new currency as a symbol of their broader
ambitions for European unity.
The intervention underlined fears that Europe faces a potential economic
shock from the combination of a sinking common currency and soaring
oil prices. Because oil is bought and sold in dollars, the recent rise in the
price of oil has hurt European consumers much more than those in the
United States.
This has heightened inflation pressure across Europe and could force the
European Central Bank to raise interest rates enough to slow the
European economy. Robust European growth, in turn, has helped extend
the record-long American expansion, so any slowdown in Europe could
directly hurt the United States.
Explaining United States participation in the currency action today, Mr.
Summers cited risks to the global economy.
"The United States and Japan joined with the European Central Bank in
concerted intervention in exchange markets because of their shared
concern about the potential implications of recent movements in the euro
for the world economy," he said in a statement.
The European Central Bank released an almost identical statement to
explain its action.
None of the central banks disclosed how much they spent to buy euros,
but some currency market analysts speculated the total was as much as
$10 billion.
The success of today's intervention will depend on whether the euro
climbs further or resumes its decline, and that may not be clear for weeks
or even months. But the banks as a group have much more money at
their disposal to buy euros, and the action today raised the prospect they
could swoop in again if they decide the euro is too weak.
"We didn't have a particular level in mind," said Otmar Issing, the
European Central Bank's chief economist. "That wasn't the goal."
Moreover, the United States decision to come to the aid of the
Europeans made the joint action far more likely to restore some luster to
the tarnished euro, several traders and analysts said.
The United States so rarely seeks to interfere in currency markets that it
carries considerable influence when it does. The global action also
represents the first time that central banks of Japan, Canada and Britain
joined the new European Central Bank in defending the euro, a vote of
support as the European bank faces the toughest test of its short
existence.
The move is risky for the Clinton administration. The strong dollar has
been an important ingredient of the record-breaking United States
economic expansion by helping keep imports relatively inexpensive and
inflation low.
If today's market action were to help restore the euro to what many
economists consider its value based on economic fundamentals, that
would mean an increase of at least 15 percent, making a euro roughly
equivalent to $1.
Any sharp decline in the dollar would raise the cost of imports in the
United States, add to the already enormous trade deficit, and possibly
force the Federal Reserve Board to raise interest rates faster or higher
than it otherwise would.
One reason international financial officials had considered active
American support for the euro unlikely is that the Clinton administration
has generally avoided taking actions that might prove detrimental to Vice
President Al Gore's presidential campaign, which depends in part on the
continued robustness of the American economy.
Speaking to reporters in Washington today, Mr. Summers sought to
navigate an apparent contradiction between his oft-repeated stance in
favor of a strong dollar and the decision to sell dollars and buy euros on
the global market. He said there had been no change in policy.
"As I have said many times, a strong dollar is in the national interest of the
United States," he said.
Currency market analysts generally viewed the intervention as a good
thing.
C. Fred Bergsten, head of the Institute of International Economics in
Washington, said he expected at least a modest rebound in the euro but
did not foresee a serious threat to the dollar's long-term strength.
"To say that you want a stronger euro is not to say that you want a weak
dollar," he said, noting the prolonged rise of the dollar versus the
currencies of all of America's major trading partners.
The decline of the euro, which has been adopted by 11 European
countries and will soon replace national currencies like the German mark
and French franc, had political as well as economic repercussions.
Denmark is to hold a national referendum on adopting the euro on
Thursday, and the currency's weakness has seriously eroded popular
support. In Britain, which has not adopted the euro, opposition to
possible future participation has intensified. Numerous European officials
have said that the euro's weakness threatens to undermine the trend
toward economic integration and a more politically unified Europe.
"It doesn't take a Ph.D. in political sciences to figure out that populist
parties all across Europe will jump on the anti-euro bandwagon," said
Joachim Fels, an economist at Morgan Stanley Dean Witter in London.
He said the euro project had become engulfed in a "confidence crisis."
The last time central banks cooperated to intervene in currency markets
was in 1998, when the United States and Japan rescued the tumbling
Japanese yen.
At the time, financial panic had spread around Asia, and American
officials were worried that any further deterioration in the yen could force
China to devalue its currency. That was seen as likely to set off a fresh
round of turmoil across the region, where the International Monetary
Fund had just committed about $100 billion in emergency financing to
shore up South Korea, Indonesia and Thailand.
The intervention worked. The yen regained about 30 percent against the
dollar. Giant investment funds and banks that had been betting on a
further deterioration of the Japanese currency were caught off guard, and
many were forced to abandon their positions with heavy losses.
But the United States has not always had success influencing the price of
the dollar.
In 1985, the United States, Japan and European banks agreed, in what
became known as the Plaza Accord, to jointly intervene and reverse a
sustained dollar surge. The dollar traded then at more than 3 German
marks, a record.
The intervention pushed the dollar down — but by far more than the
authorities had anticipated. They subsequently sealed a second pact,
known as the Louvre Accord, this time to buy dollars.
That intervention fell short of its goal, bankers said. It took many years,
until the sharp rise in the United States economy in the mid- 1990's, for
the dollar to regain its footing fully.
In part because of that mixed record, Mr. Summers has often expressed
a reluctance to intervene. His reputation was so well known that most
currency traders and analysts had considered it highly unlikely that the
United States would join any effort to strengthen the euro even if
European nations and Japan tried to do so on their own.
The intervention also caught the market off guard because even European
officials appeared almost hopelessly disunited about whether there was a
need for intervention.
Italian, Spanish and German officials have asserted in recent days that a
weak euro was not necessarily bad because it helped promote exports
and stimulate growth. "The weak euro makes our enterprises very
happy," said Giuliano Amato, Italy's prime minister.
Yet the European Central Bank had clearly been trying to shore up the
euro. The bank raised interest rates six times in the last year, moves the
market interpreted as currency support by making bank deposits and
other assets denominated in euros more valuable. And the bank last
week bought a modest amount of euros with some of its own foreign
exchange reserves.
None of those actions did much to support the currency, however, until
today's joint intervention, which traders said had a profound effect for its
sheer shock value.
"I am astonished," said Axel Siedenberg, head of economic research at
Deutsche Bank. "We always had the impression that there was no
awareness of the problem on the other side of the Atlantic."
The involvement of the United States won praise from numerous
bankers, many of whom had gathered in Prague for the annual meeting of
the International Monetary Fund and the World Bank, as well as
Saturday's meeting of Group of 7 finance ministers.
"It is a very good thing, and it is good because it was a coordinated
intervention," said Martin Kohlhaussen, president of Commerzbank of
Germany. "I hope it is enough to give the euro the necessary push that it
needs."
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