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ECB underpins ailing euro Euro jumps almost 4% after ECB, Bank of Japan and U.S. Fed intervene September 22, 2000: 9:32 a.m. ET
LONDON (CNNfn) - The European Central Bank spearheaded a long-awaited defense of the ailing European single currency Friday, saying it had joined forces with other banks to buy the euro in the open market as the currency's slump threatened to accelerate inflation in the 11-nation euro zone and hurt the competitiveness of economies elsewhere.
The euro jumped almost 4 percent, or more than 3 U.S. cents, to 88.65 in afternoon trading after the ECB, the U.S. Federal Reserve, the Bank of Japan and the Bank of England said they had bought euros. The euro has lost about a third of its value against the U.S. dollar since its inception in January 1999. It hit a low of 84.37 cents on Wednesday.
The central banks started buying euros for dollars and yen in the global currency markets Friday. As is common, they declined to say how much money they were prepared to spend. It was the first concerted intervention on behalf of a major currency since 1995.
"On the initiative of the European Central Bank, monetary authorities of the United States and Japan joined with the European Central Bank in concerted intervention... because of their shared concern about the potential implications of recent movements in the euro exchange rate," the ECB said in a statement.
Several economists in London pointed to the inflationary pressures that have cropped up in Europe as a result of the weaker euro, coming at the same time as oil prices hit 10-year highs. For countries outside the zone, the weak euro makes goods manufactured in Europe relatively less expensive, to the detriment of domestic industries.
"U.S. competitiveness was being damaged by the weakness of the euro," said Bill O'Neill, an investment strategist at HSBC, told CNNfn.com. "These coordinated moves in the currency market tend to be very significant -- at the least it should provide a base for the euro."
Only this week, several U.S. companies said the weak euro would hurt earnings, among them razor maker Gillette Co. (G: Research, Estimates) and McDonald's (MCD: Research, Estimates), the world's largest restaurant chain.
Leaders of the International Monetary Fund this week called for action in defense of the euro, echoing the wishes of several prominent European politicians.
Economists also said this weekend's meeting in Prague of G-7 finance ministers, who were likely to face pressure to rally around the ailing euro, and next Thursday's Danish referendum on whether to join the euro-zone could have been a factor in the thinking of the central bankers.
"The foreign exchange market has been a little disorderly of late, but I'm a bit surprised by the timing." O'Neill said. Many economists had predicted a move to defend would be politically inconvenient before the U.S. presidential election next month. "I wouldn't be surprised if it was because of the Danish referendum," said O'Neill.
Recent polls show the "No" campaign has a narrow lead. A victory for the "No" faction in Denmark could further weaken the euro, economists said.
No guarantee of success
Economists at Bear Stearns wrote in a note to investors Friday that the move was "well-timed". But added, "It may be game and first set to the central banks, but it is by no means 'match' on the euro's recovery yet."
Reuters reported that top government officials in several euro-zone countries, such as France, Germany, the Netherlands and Italy, spoke in favor of the euro defense Friday, following the central banks' actions.
There's no guarantee the intervention will have the desired effect, however. Japanese authorities have persistently attempted to peg back the value of the yen in recent years, without appreciable success. The British government lost billions of pounds in 1993, when it tried to keep sterling within a tied range to Germany's mark. Speculators eventually broke the government's resolve, and legendary investor George Soros reputedly made #1 billion ($1.5 billion) in a single day's trading.
In Prague Hans Tietmeyer, former president of Germany's Bundesbank refused to comment directly on Friday's ECB move, but told a packed audience of bankers, economists and IMF/World Bank officials: "In my view the markets are undervaluing Europe right now, and that's why I think it's favourable to send a signal...favourable in special cases where the exchange rate is clearly out of line."
The ECB said this was the first time it had intervened at its own behest, although it said last week it would spend some of its interest income on buying euros, an announcement it categorically refused to call intervention. Last June, the Band of Japan asked the ECB to intervene to cap the strength of the yen.
-- Martin Thompson (firstname.lastname@example.org), September 22, 2000
Banks spend #7bn in euro rescue effort
Special report: The IMF and World Bank in Prague Special report: Economic and Monetary Union
Larry Elliott and Charlotte Denny in Prague Saturday September 23, 2000
Central banks in Europe, the US and Japan took on the speculators yesterday in a high risk multibillion dollar effort to halt the decline of the euro. Alarmed by the prospect that the single currency's seemingly unstoppable slide could plunge the world economy into chaos, the leading industrialised nations launched three separate buying sprees on the foreign exchanges.
However, it was unclear last night whether the gamble had paid off, as the euro started to sink once more against the US dollar. Markets will now await the outcome of today's meeting of the group of seven leading industrialised countries in Prague to judge whether the central banks have the stomach for a prolonged battle.
The euro's plight will have joint top billing at today's talks with the G7's mounting concern about oil prices, which threaten to bring inflation and lower growth in the west.
The expected swarm of protesters was largely absent in Prague yesterday, with most stuck at the borders by Czech police. Protest coordinators said there were eight hour queues at crossing points between Austria and the Czech republic as police used any minor infringement of vehicle or immigration rules to turn back the coachloads of demonstrators converging on the city.
The mood in the city itself was tense, with a heavy police presence. The tent city set up in a disused stadium in the city to cope with the expected influx had fewer than 30 people in it. Many protesters are reluctant to use the facility, regarding it as a trap.
Yesterday's surprise intervention was initiated by the European Central Bank which won crucial US backing after it became clear that the dollar's strength was damaging the American economy. Although Britain is not a eurozone member, the Bank of England spent tens of millions of dollars supporting the action, estimated by City analysts to be worth $6bn to $7bn in total.
A Treasury spokesman said: "This is a coordinated move by the G7 authorities. As a member of the G7, we share concern about the potential implications of recent movements in the level of the euro exchange rate for the world economy."
Central banks made their move as the euro was strengthening slightly after reaching a record low of just under 84.50 cents earlier this week. With the dollar undermined by a profits warning from the US technology leader Intel, the G7 saw an opportunity to catch dealers unawares.
But the apparent show of unity was dented when the US Treasury secretary, Larry Summers, said America's strong dollar policy remained unchanged, despite the attempt to cap its value. "As I have said many times, a strong dollar is in the national interest of the United States," he said.
The intervention - the first coordinated attack on the markets for five years - was decided in an early morning phone conference between finance ministers and central bankers. After briefly touching 90 cents against the dollar after the central bank action, the euro later fell back again to 88 cents, barely a cent above its value before the move.
The G7 finance ministries issued a joint statement in the wake of yesterday's move. "At the initiative of the European Central Bank the monetary authorities of 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," the statement said.
Despite the euro's bumpy ride yesterday, some analysts believe the show of force will represent a turning point for the currency, which has lost almost 30% of its value since its launch in January 1999.
"This is the end of the dollar bull market," said Nick Parsons, a currency analyst with Commerzbank, in London. "The surprise is that it took them so long."
-- Martin Thompson (email@example.com), September 22, 2000.