ANALYSIS-French protests unlikely to produce action vs euro

Published: 25 Sep 2009 07:21:59 PST

* Euro near record high against basket of 21 currencies

* Germany appears unworried despite French concern

* ECB currency market intervention very rare

PARIS, Sept 25 - The euro has strengthened near levels where it may start to weigh on Europe's economic recovery, but complaints by France are unlikely to prompt any effort to restrain the currency's appreciation.

German policymakers have so far showed no significant concern about the exchange rate, and European Central Bank chief Jean-Claude Trichet has been silent about it. This implies the euro could gain further before there was a risk of ECB intervention in the currency markets to bring it down.

"In a sense I always tend to discard what the French have to say about the exchange rate because I know what they are going to say," said Deutsche Bank economist Gilles Moec.

"It will make a difference when other people say something," particularly the Germans, Moec said.

After climbing for several months, buoyed by signs of economic recovery in the euro zone, the euro is near all-time highs against a trade-weighted basket of 21 currencies <EUREER=ECBF>. It previously reached such levels in April and December 2008.

Against the dollar <EUR=>, the euro is trading around $1.47, closing in on the record high of $1.6038 hit in July last year. It has surged from around $1.42 early this month and a low of $1.2455 reached in March 2009.

A French official said on Wednesday that France was "worried" by the euro's rise and keen to see the summit of Group of 20 nations in Pittsburgh prepare the way for discussion of exchange rates in the future. [ID:nLN628058]

Last week, the European Union's Economic and Monetary Affairs Commissioner Joaquin Almunia warned that any surge in the euro's value caused by China diversifying its currency reserves would be negative for Europe. [ID:nLI536715]

GROWTH

Such warnings may be justified. Competition between European aircraft maker Airbus and U.S. arch-rival Boeing is the most frequently cited area where exchange rates are important, but the same goes for other sectors such as cars, said Simon Derrick, head of currency research at Bank of New York Mellon.

Airbus chief executive Tom Enders said in November 2007 that the euro's exchange rate, which had risen some 12 percent over the year to around $1.48, had become "life-threatening" for his company. The currency is now back at roughly the same level.

"The risk is it ends up driving Europe into the ground," said Derrick. "Even since the euro started to rally again this summer, you can see outflows from German equities, which is rational."

But senior officials in most of the 16 euro zone countries have remained silent about the exchange rate this month, as they have during most of the decade since the euro's launch in January 1999.

Most important is the silence of German politicians and policymakers. They may be distracted by the approach of this weekend's German elections, but there are other reasons; German politicians did not complain even when the euro hit its record high in July 2008.

Historically, the Germans have been sensitive to the dangers of inflation, which euro strength helps to curb. And they have less reason to worry about currency appreciation than France since many of their exports are at the upper end of the market, where brand and quality help fend off price competition.

Moec reckons a 10 percent rise in the euro's real effective exchange rate lowers French exports by 6 percent but German exports by only 4 percent.

INTERVENTION

Without pressure from Germany, the euro zone's economic and political giant, the ECB appears unlikely to intervene to halt the euro's rise.

Under EU rules, it must conduct its foreign exchange operations within the framework of its main goal, keeping price stability -- so it could theoretically intervene if swings in the euro threatened inflationary or deflationary pressure.

EU finance ministers have the authority to give general directions on exchange rate policy. But the European Council of EU leaders agreed it would only exercise these powers in exceptional circumstances and without threatening the independence of the European central bank system.

And in practice, the EU has only ever launched one campaign of currency intervention, in late 2000. That action was to halt a euro slide rather than a rise.

UniCredit chief economist Marco Annunziata therefore thinks the euro's appreciation has further to go.

"We're approaching significant pain thresholds," he said. "I think we will go above $1.55 again in the coming months, and if we approach $1.60 the screams of agony will become louder and more widespread in the euro zone.

"At that stage I suspect that investors in FX markets would also become very worried as to the impact on the euro zone growth outlook, and would soon start to pull back." (With input from Reuters bureaux in Frankfurt, Berlin and Paris)