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Dollar Gains Against Euro as Germany, France Seek ECB Rate Cut

Feb. 26 (Bloomberg) -- The dollar rallied to the highest in almost a month against the euro after French Prime Minister Jean- Pierre Raffarin joined German Chancellor Gerhard Schroeder in calling for the European Central Bank to cut interest rates.

The U.S. currency also rose to the highest in almost three months versus the yen, after gaining 3.9 percent since Feb. 12. It strengthened against the British pound, Swiss franc and 11 other major currencies.

``We've gone from neutral on the U.S. dollar to bullish'' after concluding that the euro's 15 percent rise in the past year was crimping European exports, said Jack McIntyre, who helps manage $3.7 billion of debt at Brandywine Asset Management Inc. in Wilmington, Delaware. ``You couldn't pick up a newspaper without someone saying something negative about the dollar.''

Against the euro, the U.S. currency advanced to $1.2437 per euro at 5 p.m. in New York from $1.2502 late yesterday, according to EBS prices. Compared with the yen, the dollar appreciated to 109.60 from 108.99.

``People have gotten themselves short dollars just across the board,'' said Seth Toney, head of foreign exchange in New York at Dresdner Kleinwort Wasserstein, the securities unit of Allianz AG, Europe's largest insurer. Talk that the ECB would lower interest rates ``was an excuse for people to cover'' those bets that the dollar would weaken this year, he said.

Schroeder, in his second comment on the currency in two days, today said in a speech to executives in Chicago that a reduction in the ECB's key rate ``could be useful.'' Raffarin said the speed and extent of the euro's gain is ``a concern.''

Rate-Cut Case

The chancellor, who is traveling in the U.S., will discuss the dollar's decline with U.S. President George W. Bush tomorrow in Washington, a German official said. ECB spokesman Jukka Ahonen declined to comment on Schroeder's remarks.

``Suddenly comments from European officials expressing concern about the level and rate of change in the euro seem to have had an impact,'' said John Rothfield, senior currency strategist at Bank of America Corp. in San Francisco. Slowing inflation in Europe ``makes the case for a rate cut, even independent of where the euro is, more compelling.''

Inflation in the dozen-nation euro region stayed at the ECB's 2 percent limit in January as consumer spending remained sluggish.

Expectations for a rate reduction are rising, futures trading shows. The rate on the three-month Euribor contract for June settlement has dropped 17 basis points since the end of January, to 1.99 percent today, below the ECB's benchmark rate.

Volkswagen

The dollar, which in 2003 had its worst year against the euro since the common currency made its debut in 1999, has climbed 2.3 percent in the past five days on concern European officials will seek to thwart gains beyond $1.30. It reached a record high of $1.2930 on Feb. 18.

``The pressure we have heard from European officials on the ECB'' is hurting demand for the euro, said Karl Halligan, chief currency trader in New York at CIC, the investment-banking arm of CIC Group, an association of French regional banks. ``If it starts moving down to that $1.23 area, there certainly will be some players who will take their cards off the table.''

The stronger euro crimps profit from dollar-based sales when translated back into euros. Volkswagen AG said last week it will reduce its dividend for the first time in 11 years as earnings fell 60 percent, partly because of the dollar's drop.

The ECB's benchmark rate is 2 percent, twice the level of the Federal Reserve's target rate. The ECB last cut its rate in June, by half a percentage point. Unlike the Bank of Japan, the ECB hasn't tried to steer the foreign-exchange market by buying or selling euros since 2000, when it purchased the currency.

ECB Response

The ECB has responded to political pressure in the past by postponing rate decisions. ``I hear, but do not listen,'' former bank chief Wim Duisenberg said on April 11, 2001, after the ECB refused to follow the U.S. Fed, Bank of England and Bank of Japan in lowering borrowing costs. It waited a month to act.

``Europe signed up to the fact that the dollar has to weaken, but it hasn't been an equitable weakening,'' said Matthew Cobon, who helps manage about $70 billion in currencies at Deutsche Asset Management in London. The euro's gain against the dollar in the past year was more than twice the pace of the yen's 7 percent appreciation.

In Japan, Finance Minister Sadakazu Tanigaki said the government is ready to take ``appropriate action'' to prevent the yen's two-year rally from quashing the economy's revival after three recessions in 12 years.

Bank of Japan

``There is even at these higher dollar levels some action by the Ministry of Finance,'' said Uwe Parpart, senior market strategist in Hong Kong at Bank of America Corp.

The Bank of Japan sold yen at least once this week, said traders who deal with the BOJ and asked not to be identified. The central bank sold a record 7.15 trillion yen ($65.5 billion) in the four weeks through Jan. 28. The Ministry of Finance will release February sales figures tomorrow.

Japan may have spent 3 trillion yen this month, said Michael Klawitter, a currency strategist at WestLB AG in London. The government releases the figures tomorrow.

To contact the reporters on this story:

Monee Fields-White in New York at [email protected].

To contact the editor of this story:

Robert Burgess [email protected].

Last Updated: February 26, 2004 17:08 EST