euro exchange rate at $1.50 is a disaster for the European economy and industry

“The euro exchange rate at $1.50 is a disaster for the European economy and industry," said Henri Guaino, right-hand man of President Nicolas Sarkozy. The currency has risen 15pc in trade-weighted terms since March, equivalent to six quarter of a percentage-point rises in interest rates. It briefly flirted with $1.50 against the us dollar rate on Tuesday before falling back on intervention fears.

What concerns European policymakers most is the lockstep rise against China's yuan. Beijing has clamped the yuan firmly to the weak dollar for over a year, quietly benefiting from the export advantages. It accumulated $68bn (£41bn) in reserves in September alone as a side-effect of holding down the currency. Fresh reserves are mostly being invested in eurozone bonds, pushing the euro higher.

French finance minister Christine Lagarde said it was intolerable that Europe should "pay the
price" for a dysfunctional link between the US and China. "We want a strong dollar, and we have reiterated it again in the strongest manner," she said after this week's Eurogroup meeting. China's trade surplus with the EU reached €169bn (£154bn) last year.

Europe and Japan are now the last two blocs standing as everybody else lets their currencies
fall, or takes active measures to hold down the exchange rate -- with "beggar-thy-neighbour" echoes of the 1930s. Brazil has become the latest country to intervene, resorting to controls to cap the real after its 42pc rise against the us dollar exchange rate since March. It is imposing a 2pc tax on flows into bond and equity markets. Finance minister Guido Mantega said the move was to head off an asset bubble. Critics called it a "desperate move" that would distort markets.

Hans Redeker, currency chief at BNP Paribas, said the strong real is "eating away" at Brazil's
manufacturing base. "They are not willing to take any more of the adjustment burden as long as China and other surplus countries do nothing," he said.

Switzerland is openly intervening to hold down the franc in order to stave off deflation. Canada and New Zealand have talked down their currencies. Britain and Sweden have opted for stealth devaluations.

Korea, Thailand, Taiwan, the Philippines, Indonesia and Russia have all been buying dollars to
stem their currencies' rises. The effect is to perpetuate the imbalances that led to the credit bubble from 2004-2007 and ultimately caused the financial crisis. Reserve accumulation fuels asset booms because it creates a wash of liquidity and drives down global bond yields. Asia
clearly needs to sharply revalue against the West to right the system.

Professor Michel Aglietta from Paris University says the euro exchange rate is 40pc above its
purchasing parity of level $1.07 (a low estimate), citing it as the reason why Peugeot and Renault have shifted annual production of one million cars to Eastern Europe since 2004.

Airbus is moving plants offshore, building A320 jets in China. It is relying heavily on US
contractors for its A350 jet. Fabrice Bregier, Airbus chief financial officer, said the current exchange rate is "becoming very difficult for all industrial companies which have their costs and need to buy euros. We can only appeal to monetary authorities to see to it that there is stability in exchange rates."

The European Central Bank could take some of the steam out of the euro rate by signalling a less hawkish policy. It may be pressured into doing so. EU ministers have the final say on exchange rate under Maastricht, though they have never used this power – publicly.

What is missing is a unified front of EU governments. Italy has been remarkably quiescent,
given its export slide. Germany has a higher pain threshold for a strong currency after gaining competitiveness by squeezing wages. But there are limits even in Berlin. The IWK institute says the danger point for German exporters is $1.45.

Jean-Claude Trichet, ECB president, has stepped up his rhetoric against "disorderly" currency
moves, warning that authorities on "both sides of the Atlantic" were monitoring the markets. He made an unscheduled appearance on Monday to drive home the point. The body language is changing.

For the Full Story visit www.telegraph.co.uk

Bye for Now

IMSFX and Travel FX

Buying Euros? Buy Euros at the best euro Rates! Get a quote for Buying Euros now!
Buying Dollars? Buy US Dollars at the Best Dollar Rates! Get a quote for Buying Dollars Now!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates! Get a quote for Buying Australian Dollars Now!

Need to Buy Holiday Money? Buy Travel money at the best exchange rates visit
www.travelfx.co.uk and save on your travel and holiday money needs


Contact IMS Foreign Exchange + 44 207 183 2790