PARIS (MNI) – Eurosystem monetary authorities are happy with the
euro’s weaker exchange rate and have not discussed currency intervention
so far, though they are monitoring the market for signs of an
excessively rapid drop, well-placed central bankers told Market News
International.

The officials also said the European Central Bank is still debating
how best to smooth the impact on money markets when E442 billion from
last June’s one-year long-term refinancing operation (LTRO) is repaid by
banks on July 1. While there may be some rollover, perhaps for a month
or so, it is highly unlikely there will be another one-year tender.
Liquidity conditions in the Eurosystem will thus be tightened to some
extent, they said.

This thinking is in line with recent comments by ECB Executive
Board member Juergen Stark, who said that the expiry of the June 2009
LTRO offered an opportunity to begin tightening conditions.

The sources expressed concern that central bankers and EU
government officials had lost some credibility in the eyes of markets as
a result of their reaction to the recent crisis.

They ascribed this in part to poor communication, especially by EU
governments, but also to the fact that financial agents demand concrete
actions much faster than politicians are able to deliver them in the
real world. This has created a dangerous gulf between the two, some of
the sources complained.

The sources also said the ECB’s Governing Council was acutely aware
of the threat to its credibility when it reversed policy and decided to
buy government bonds. But, with the exception of a few dissidents —
most notably Bundesbank President Axel Weber — the Council felt it had
no choice, given the rapidly deteriorating conditions in global
financial markets.

Better than expected activity in the second quarter could lead to
an upward revision of the ECB staff’s 2010 growth forecast, just as the
weaker euro is likely to result in an upward appraisal in the inflation
outlook.

But Council members are not likely to put great stock in the
forecasts because the outlook is so clouded right now by the situation
in financial markets. “The high level of uncertainty cannot allow us to
estimate, and the summer months are crucial,” said a senior Eurosystem
official.

With regard to the euro’s recent weak performance on the foreign
exchanges, there are no alarm bells sounding in the Eurotower in
Frankfurt. The single currency has fallen steadily, sometimes dizzily,
in recent months to below $1.20 this week — light years away from its
heady pre-crisis high above $1.60. And as far as the ECB is concerned,
at least for now, that’s just as well.

“We are not worried about the euro and so far there has been no
discussion about intervention,” said the senior Eurosystem official.
“What we’ve seen in the press [about intervention] is only speculation.”

The euro’s current level “reflects economic fundamentals” and
“helps with exports and with the recovery of the European economy,” this
official said. “What we monitor,” he added, “are the intense
fluctuations in the foreign exchange markets, which are undesirable.”

He said he could envision the euro stabilizing “around current
levels until the signs of recovery are solid.”

Another source noted that there are divergent views within Europe
about the desirability of a weaker euro. It is beneficial to exporters
and harmful to importers, “and some [national] economies will benefit
more, others less,” he noted. “You can’t base your policy on that. For
the short term what has happened doesn’t make much difference.”

A third official said simply that the exchange is not an issue
right now for the ECB.

–Paris Newsroom, +331 4271 5540; paris@marketnews.com

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