Financial thoughts

European Central Bank President Jean- Claude Trichet said he's concerned the euro's gains will hurt Europe's economy and signaled interest rates are high enough to curb inflation.

The ECB is worried about the euro's “sharp fluctuations'' and the “possible implication for financial and economic stability,'' Trichet told reporters at a conference in Frankfurt today. Current interest rates “will contribute to achieving our objective, which is price stability,'' he said, adding that's “the position of the Governing Council.''

ECB policy makers including Axel Weber, Juergen Stark, Yves Mersch and Klaus Liebscher have suggested the bank's benchmark rate of 4 percent may not be high enough to rein in inflation, which accelerated to a 16-year high of 3.6 percent last month. The widening gap between ECB and Federal Reserve interest rates has fueled the euro's gain to a record against the dollar, undermining the outlook for European exports.

“Trichet probably realized that some of his colleagues had moved a step too far towards a tightening bias,'' said Aurelio Maccario, an economist at Unicredit MIB in Milan. “I would label it a welcome retrenchment from comments that made headlines in the past week.''

Business confidence in Germany and France, which account for about half the euro-region economy, slumped this month as record oil and food prices stoked inflation, reports showed today.

The euro, which reached a record $1.60 on April 22, dropped 2.5 cents today and traded at $1.5653 at 6:40 p.m. in Frankfurt.

G-7 Frustration

The euro has gained about 10 percent against the dollar in the past six months, prompting the Group of Seven nations to warn April 12 that recent “sharp fluctuations'' risk hurting the global economy instant payday advance. While it was the first significant change in wording on currencies since February 2004, Canadian Finance Minister Jim Flaherty said yesterday it “doesn't seem to have affected the market very much.''

Luxembourg Finance Minister Jean-Claude Juncker has also expressed frustration that investors haven't paid more attention to the change in the G-7's language and yesterday said he didn't like “the way things are developing.''

Stark, who on April 15 said the ECB “cannot be sure'' interest rates are high enough to contain inflation, today struck a more optimistic tone. The ECB's past rate increases are still working through the economy and will help to curb price pressures, Stark told reporters in Frankfurt.

Difficult Argument

“We increased interest rates by 200 basis points'' since December 2005, Stark said. “This will have its impact in the quarters to come. This is the reason why we say up to now that the current monetary-policy stance will contribute to achieving our medium-term objective.''

ECB council member Michael Bonello also indicated today he doesn't see a need for rates to be increased from their current level. “No one thinks interest rates should be higher than 4 percent,'' said Bonello, who heads Malta's central bank. “It's very difficult to make the argument for higher interest rates.''

The ECB aims to keep average inflation just below 2 percent, something it has failed to do every year since 1999.

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