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Trichet warns on exchange rate swings Ralph Atkins and Krishna Guha European concerns about the impact of the falling dollar came into sharp focus on Thursday as the European Central Bank issued its strongest warning yet about “brutal” exchange rate movements. As the dollar hit a 26-year low against sterling and neared a record low against the euro, Jean-Claude Trichet, ECB president, said recent exchange rate moves had been “undoubtedly sharp and abrupt”, adding that brutal moves were never welcome. At the same time, Ben Bernanke, chairman of the US Federal Reserve, said the falling dollar and soaring oil prices posed risks to US inflation. Mr Trichet’s comments echoed language he used when the euro was strengthening rapidly at the end of 2004 and suggest the ECB believes exchange rates are constraining its room for manoeuvre in setting interest rates. As expected, the ECB held rates at 4 per cent on Thursday. The Bank of England also left its benchmark rate on hold at 5.75 per cent.
The ECB almost certainly believes that more overt currency market intervention requires agreement with other central banks. But in spite of concerns that the weaker dollar will increase the risk of inflation, the Fed has shown no interest in currency intervention. The ECB also said it would again inject €60bn ($88bn) in each of two separate operations to ease tensions in the three-month money market – an acknowledgment that market turmoil is not over.
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