The world is left waiting for Wim Duisenberg's reaction to the latest plunge
If the euro drops to a record low and nobody from the European Central Bank tells us how undervalued it is, does it make a sound?
By now we should have been inundated with ECB speeches, peppered with phrases such as '. . . poised to rally . . . not reflecting fundamentals . . . a strong euro is in the interests of the euro area . ..'' Instead, Wim Duisenberg and his team seem to have taken a vow of silence on the currency.
While this is a welcome development, it's puzzling. So far in the euro's nasty, brutish and short existence, each new drop has been accompanied by a chorus of central bankers decrying the slump while confidently predicting a rebound. Watching the euro drop as low as 85.03 cents towards the end of May is the equivalent of watching a Hitchcock film without the soundtrack; the spectacle loses some of its power to shock.
We're already well below the levels at which the ECB might have been expected to start trying to turn the tide for its currency by buying euros, based on the levels which triggered intervention last year. So there must be some explanation for the ECB's Trappist tendencies ' such as the central bank's newly discovered appetite for trying to stimulate growth, as evidenced by the surprise 10 May cut in benchmark interest rates by a quarter-point to 4.50%.
It was way back on 14 September when the ECB stuck its first toe in the currency waters by announcing plans to use $2.2bn of interest earned on foreign exchange reserves to buy euros. Not quite intervention but not quite non-intervention either.
Cue change of tactics. The ECB persuaded its central banking peers to fill out some euro purchase slips on 22 September. The euro had closed 21 September at 85.77; the combined might of the Federal Reserve, the Bank of Japan and the Bank of England propelled the euro all the way up to the nosebleed-inducing, stratospheric heights of . . . well, actually, it couldn't even get its nose above 90 cents, faltering at 89.92 cents. Its average rate for the past six months has been about 90 cents; in the past month, that's slumped to 87.74 cents.
The euro was supposed to rally to 94 cents by mid-year, according to the average forecast of 56 analysts, investors and traders polled by Bloomberg News at the end of the first quarter. Now, a revisit of the 26 October low of 82.31 cents is looking much more likely.
Citibank, the number one foreign-exchange bank in Euromoney magazine's annual currency market-share survey, was bang in line with that March consensus. Recently the bank cut its six-month euro forecast to 82 cents. Its 12-month forecast is 85 cents.
UBS Warburg, which had the most accurate forecasts among 58 participants in Bloomberg's first-quarter survey, was anticipating a mid-year rate of 96 cents.
Now it sees 85 cents as next month's level, and currency strategist Shahab Jalinoos says he might lower that target this week. Goldman Sachs cut its three-month estimate to 88 cents from 98 cents last week, while CIBC World Markets now forecasts 85 cents by the end of June, paring its previous 92 prediction.
It's worth recalling that even those older, more bullish forecasts would leave the single currency miles away from its starting rate at the beginning of 1999 of $1.16675. The euro has been worth less than a dollar since February 2000.
On the 29 May the currency fell to a six-month low of 85.39 cents, yet there's still no sign of intervention ' verbal or otherwise ' from the ECB or its peers. Moreover, Duisenberg seems unperturbed by recent developments. He told the European Union Parliament's Committee on Economic and Monetary Affairs recently that intervention is still 'a weapon in our arsenal,'' though he also said 'in nominal terms the euro has depreciated. In nominal, effective terms, it has appreciated.'' Guess it all depends on what 'nominal'' means. Maybe central bankers have finally learned the lesson the markets have been trying to teach them for several years now; intervention doesn't work, especially when the central bank in question lacks credibility.
What Duisenberg can't say out loud is that the euro's 9.33% drop against the dollar this year provides a handy bulwark against slowing growth, especially when the Federal Reserve is going gangbusters on cutting interest rates to get its economy back on track, while the ECB is still wrestling with the problem of an inflation rate that's outpaced its 2% goal for 11 months and was 2.9% in April.
The deafening silence that's accompanied the euro's latest plunge makes a nice change from the bleating we've come to expect. Enjoy it while it lasts.
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Alongside Barrett, Hopkins, Boston and Thorman on 17 October