The euro may have helped European Central Bank President Jean-Claude Trichet decide against a June interest-rate increase, economists said. The single currency has gained almost 9 percent against the dollar this year, fueled in part by a transatlantic split in monetary policy as the ECB has started raising interest rates while the Federal Reserve is showing no signs of following. Trichet yesterday dashed bets of some investors anticipating a rate increase next month and signaled policy makers are growing more concerned about the euro’s strength. “The recent rise in the euro exchange rate may be among the factors that seem to have pushed the likely time for the next rate increase back to the July meeting,” said Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London. Trichet took the unusual step of reading aloud recent statements from Fed Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner, rather than just referring to the U.S.’s position in general terms as he typically does. Geithner said April 26 that “a strong dollar is in our interest as a country,” a day before Bernanke said the Fed “believes that a strong and stable dollar is both in American interest and in the interest of the global economy.” Stronger Euro “I entirely share myself the analysis the two authorities have produced,” Trichet said in Helsinki yesterday after refraining from using the phrase “strong vigilance” that would have signaled a June rate increase. “We are of course incorporating in our analysis this exchange rate situation.” While a stronger euro helps the ECB tackle inflation, the rise threatens to slow expansion, especially the growth of crisis-torn nations such as Portugal and Ireland reliant on exports as they impose austerity on their economies. The euro fell the most against the dollar in two weeks after Trichet’s remarks and traded at $1.4535 at 10:11 a.m. in Frankfurt, little changed from yesterday. “Trichet went out of his way to emphasize the relationship of the dollar and euro,” said Julian Callow, chief European economist at Barclays Capital in London. “There has been a substantial appreciation and that suggests other things being equal that forecasts should be getting revised downward.” Callow quoted Organization for Economic Cooperation and Development research which suggests a 10 percent increase in the euro on a trade-weighted basis saps euro-area growth by 0.7 percentage point in each of the subsequent two years. It is up about 5 percent on that basis since November, he said. ‘Time to Decide’ ECB council member Ewald Nowotny told reporters at a conference in Helsinki today that policy makers want “full information especially about medium-term inflation expectation developments also with respect to 2012.” The ECB will have new staff projections in June and “that is the time to decide.” Ken Wattret, an economist at BNP Paribas SA in London, said another rate increase so soon after April “could have panicked markets about how aggressive the ECB tightening cycle would be, pushing the euro exchange rate sharply higher.” “With wage growth contained, and money and credit growth rates low, there was no need for the ECB to take the risk,” Wattret said. Economists at Societe Generale SA, and Royal Bank of Scotland Group Plc were among those to break with the consensus before the decision by predicting Trichet would signal a rate increase in June, two months after the ECB lifted its benchmark to 1.25 percent from a record low of 1 percent. No Alarm Companies are expressing differing responses to the euro’s gains. Software AG, Germany’s second-biggest maker of business software, said April 27 that the currency is a “headwind.” At the same time, it allowed airline Deutsche Lufthansa AG to cut fuel-cost projections by 200 million euros ($292 million) to 6.6 billion euros this year. Politicians have so far chosen not to sound the alarm on the currency. French Finance Minister Christine Lagarde told Bloomberg Television on May 4 that a strong euro benefits the region’s companies as it cuts costs of raw materials priced in dollars and forces European firms to seek additional ways to boost competitiveness. The single-European currency is doing “extremely well” Lagarde said in Hanoi, even as she added that she would like to see a “strong dollar.” July Forecasts Societe Generale economist Veronique Riches-Flores said in a report this week that the euro area has a greater capacity to weather a stronger euro than in 2008. That’s because the currency’s gains are less broad this time, inflation in Asia means its real value in emerging markets has declined and its strength helps offset the surge in oil costs, she said. By waiting to raise rates again, euro-area policy makers may want more time to assess the health of their economy before adding to April’s monetary tightening. While inflation accelerated to 2.8 percent last month and the economic growth has shown resilience, increases in borrowing costs and the euro may exacerbate Europe’s debt crisis that has already forced Greece, Ireland and Portugal to seek external help. The respite may not last long, with economists at Nomura Holdings Inc., Morgan Stanley and Citigroup Inc. among those holding fast to forecasts that the ECB will act again in July. “The ECB is likely to escalate its language to ‘strong vigilance’ in June,” said Citigroup’s Juergen Michels. “The ECB highlighted that current interest rates are ‘very accommodative,’ suggesting that further rate hikes will follow.” To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net. To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Source