ECB policymakers leap to euro's defense

FRANKFURT (Reuters) - European Central Bank policymakers have leapt to the euro’s defense, saying it remained a strong currency, after a tumultuous week in foreign exchange markets.

ECB President Jean-Claude Trichet denied the euro was in danger and said it was a credible currency, prompting a jump in the single currency against the dollar on Friday. Trichet turned the spotlight instead on spend-thrift governments in his latest public relations offensive in German media.

“Let us be clear, it is not the euro that is in danger, but the fiscal policy of some countries that has to be, and is being, addressed,” he told the Frankfurter Allgemeine Zeitung in an interview conducted on Wednesday, when the euro hit a four-year low against the U.S. dollar at $1.2143.

“Market movements are always a combination of the mood of investors and the influence of speculative investors, such as hedge funds,” he said according to an English-language transcript of the interview released by the ECB.

ECB Governing Council member Ewald Nowotny, head of Austria’s central bank, took out full-page advertisements in Austrian newspapers on Friday in a bid to allay concerns about the single currency.

The euro rose broadly on Friday to as high as $1.2673 and was set for its first weekly gain against the dollar in six weeks, partly on speculation that officials may intervene to support the currency.

Trichet refused to comment on whether the ECB could step in to prop up the euro, which has dropped about 10 percent on a trade-weighted basis in the last three months.

“I never comment on interventions,” he said.

The ECB has not intervened in currency markets since late 2000, when concerted waves of action -- initially with other central banks -- succeeded in putting a floor under the euro at 82 cents. The currency had at that time slid 11 percent on a trade-weighted basis in 10 months.


Nowotny said in an advertisement for the Austrian Central Bank published in daily Wirtschaftsblatt and a regional newspaper on Friday that there was no cause for concern about the current exchange rate.

“Volatile exchange rates are not wished for by the ECB but the current euro-dollar exchange rate is clearly within the historical range and give no reason for special concern,” he said in the ad.

Trichet said low inflation in the 16-nation region was the best measure of the euro’s success. (Right click on for inflation graph)

“The euro is a credible currency. The fact that it is a currency whose rate of inflation has been below 2 percent for over 11 years demonstrates its trustworthiness. Price stability is a key feature of the euro and a major asset for domestic and international investors.”

Public opinion in Germany is suspicious that the ECB’s recent purchases of government bonds may increase pressure on inflation, but the ECB denies this.

ECB Executive Board member Juergen Stark said the purchases would be offset by mopping up extra liquidity.

“It is not so that we have a soft euro at the moment, the purchasing power of the euro is secured and will remain so,” he told German radio WDR 5.

Trichet said the ECB had reintroduced some of its emergency lending measures in response to the sovereign debt crisis but would not keep these forever.

“You can be sure that we will exit those measures in a timely fashion accompanying the improvements in the functioning of the markets,” he said.

“We will never lose sight of our primary mandate of ensuring price stability over the medium term, with the right monetary policy stance.”

Reporting by Marc Jones and Sakari Suoninen, additional reporting by Sylvia Westall in Vienna, writing by Krista Hughes; Editing by Susan Fenton