Financial Regulatory Forum

France, China worry about U.S. dollar weakness

By Reuters Staff
October 20, 2009

By Gertrude Chavez-Dreyfuss and Emmanuel Jarry
NEW YORK/PARIS, Oct 20 (Reuters) – France said on Tuesday the euro at $1.50 was a disaster for Europe and joined China in worrying that a weak U.S. dollar would stoke inflation.

The Bank of Canada also chimed in, saying its currency’s strength against the greenback would “more than offset” good news on the Canadian economy. The remarks came after the Canadian central bank held interest rates steady at 0.25 percent and said it would keep rates on hold until mid-2010.

The latest comments from officials and companies around the world added to the debate about imbalances between currencies that is likely to continue at a meeting of G20 finance ministers and central bankers in Scotland in November.

France has been pushing for an international exchange rate discussion and has led European complaints about the euro, which on Tuesday traded just shy of $1.50, a level not seen since August 2008.

“A euro at $1.50 is a disaster for European industry and the economy,” Henri Guaino, President Nicolas Sarkozy’s speech writer, told reporters on the sidelines of a conference of Sarkozy’s ruling UMP party.

Guaino, who is one of Sarkozy’s inner circle of advisers, said that at some point the euro’s strength against the dollar would become unbearable and Europe would have to react, most likely by printing euros that would also lead to inflation.

France was disappointed that leaders of the G20 developed and developing nations, who met in Pittsburgh in September, discussed global imbalances without touching on currencies.

In the case of Canada, its central bank has long expressed worries about the surging Canadian dollar, which has gained 16 percent this year versus the greenback. The bulk of Canadian exports go to the United States and a strong currency makes its products less competitive.

On Tuesday, the BoC reiterated its concern, saying strength in the Canadian dollar is working to “slow growth”.

There are also growing signs China is concerned about the domestic implications of its yuan currency peg.

“In the circumstances of a falling U.S. dollar exchange rate, net capital inflows may intensify, adding to excessive liquidity pressure at home and increasing inflation risks,” Ma Delun, a vice-governor with the People’s Bank of China, said on Tuesday.

Earlier this month, the G7 group of industrialized nations, which excludes China, singled out the yuan, urging authorities to let it strengthen.

INFLATING PUBLIC DEBT?
U.S. officials have said they want a strong dollar but France’s Guaino accused the United States of having a policy aimed at inflating away the public debt. Guaino said the United States was “flooding the world with liquidity” and said eventually Europe would be forced to react.

“When the Americans create dollars and the dollar falls, there is a point at which you cannot take it any more,” he said. “What do you do? Either you create liquidity to bring the euro down, or you let the euro rise, rise, rise and then you are completely suffocated.”

The euro zone single currency has strengthened 6.6 percent against the U.S. dollar since the start of this year.

Earlier this month, the chief operating officer of European planemaker Airbus, Fabrice Bregier, said the euro’s strength is becoming “very difficult for all industrial companies which have their costs in euros.”

The level of the U.S. dollar is also a problem for companies trading outside the 16-nation euro zone.

Swiss-based biotech company Actelion, which generates nearly half its sales in the United States, said its third-quarter profit was flat at 108 million francs, hurt in part by the weak dollar.

Within the euro zone, the impact of the dollar’s weakness is a subject for debate although there is no general agreement over how big a problem it might be.

Finnish Finance Minister Jyrki Katainen told Reuters on Tuesday the strong euro was a problem but others are less concerned.

Spanish Treasury Secretary Carlos Ocana said the euro was trading at normal levels while the German exporters’ association, BGA, said trade prospects would brighten in the coming months despite expecting a further rise in the euro.

Meanwhile, the International Monetary Fund’s First Deputy Managing Director John Lipsky said on Tuesday that a weaker U.S. dollar has so far not hindered a global recovery. But over time, he expects currencies will play a role in the necessary rebalancing of the global economy.

(Additional reporting by Jamie McGeever in London, Randall Palmer in Ottawa and Alister Bull in Washington; Editing by James Dalgleish) (gertrude.chavez@thomsonreuters.com; Tel: +1 646 223 6322; Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))

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