ECB joins finance chiefs to issue Euro warning

BRUSSELS - The European Central Bank (ECB) and euro zone finance ministers on Monday issued their starkest warning to date that they are unhappy with the euro's surge and said they were closely monitoring exchange rate swings.

In an echo of developments that preceded the ECB's first intervention in the currency markets in 2000, the head of the central bank joined the chairman of the 12 euro zone finance ministers at a news conference to reinforce the message of a written statement.

While the euro zone was then trying to lift its currency from record lows, four years later they are trying to halt gains that saw the euro hit record highs around US$1.3460 on Friday.

The kiwi was today trading at €0.54.

"We are of the opinion that excessive volatility and disorderly movements in exchange rates are undesirable for economic growth," said a joint statement read out by Dutch Finance Minister Gerrit Zalm after euro zone talks attended by ECB President Jean-Claude Trichet. While this was a repeat of recent protests against the euro's rise, new language was added to grab the foreign exchange market's attention.

"We will monitor the situation closely," it added -- phrasing similar to that used in 2000 and one that is often deployed by the Group of Seven industrial nations.

Zalm said the statement had been tweaked from past protests against a strengthening euro -- a point quickly picked up by the currency markets.

"I still don't think the threat of intervention is there yet but the rhetoric is being stepped up and we have to take this into account," said Jens Nordvig, currency strategist at Goldman Sachs in New York.

"This is a new phrase and it is significant they are saying it jointly."

The strong euro risks crimping the performance of exporters in the dozen-member bloc by making their goods and services more expensive in foreign currency terms and by eroding the value of their overseas earnings.

Against this backdrop, the European Commission has turned more cautious about euro zone economic prospects even though oil prices have retreated from recent record highs in a move welcomed by Zalm and others.

"We have become somewhat more worried (since official forecasts were issued in October) as some of the downside risks that we presented then may be materialising," Monetary Affairs Commissioner Joaquin Almunia told a press conference.

However, economic recovery has not been stamped out, according to the statement which said euro zone growth would continue, albeit at a more moderate pace.

Euro zone finance ministers have been stepping up pressure on the United States to cut its huge budget and current account deficits which they blame for the dollar's slide.

They hammered home that point in the joint statement without naming any names.

"Recent sharp moves of exchange rates are unwelcome and not conducive to orderly adjustments of external imbalances. All major countries and economic areas must play their part more actively in reducing global imbalances by putting in place the appropriate economic policies," the statement said.

"If any currency is moving at the moment it is the dollar and this is linked to the budget and trade imbalances in the United States," said Belgian Finance Minister Didier Reynders.

Newly-installed French Finance Minister Herve Gaymard also stressed the need for trans-Atlantic cooperation.

"It is clear that, with our American partners, this dialogue must continue notably in the framework of the G7," he said.

Trichet, who has previously described the dollar's fall as "brutal" and unwelcome, made it clear there was work to be done in Europe as well as the United States.

"(I told euro zone finance ministers) we all had homework to do. We had a consensus on the area where homework had to be done." the central banker told a news conference. "It is true certainly for both sides of the Atlantic."

Zalm spelt it out by saying the United States needed to raise its savings rate while Japan and Europe had to speed up their growth through "more fundamental economic reforms".

- REUTERS