Azerbaijan, Baku, 14 April / Trend corr A.Badalova/ According to Luca Bindelli, the economist of the British bank Morgan Stanley, a strong European currency will impede the European economic growth.
"While ECB acknowledges the downside risks to growth, their focus is still on inflation risks. Furthermore, upside risks to inflation prevail for them in the medium term. Ultimately, we think the global slowdown, the strong EUR and the persistent high Libor premiums over the target rate will all put a brake on the EU economic growth, helping lower the risks on inflation. Accordingly, the ECB should ease, but only later this year. Our European economist foresees a 25bp rate cut in 4Q 2008," Bindelli said to Trend on 14 April.
On 10 April, the CEB administration decided not to change the key interest rate (4%), while the Bank of England cut the interest rate by 0.25% to 5%. CEB's unanimous decision aims at a counteraction to inflation in the Eurozone.
"Currently, the most undervalued currency in the majors is indeed the dollar, particularly against the EUR (i.e. EUR is strongly over-valued). We would suggest that a dollar appreciation is looming as soon as the Fed signals will stop lowering the policy rate and the US economy gives signs of recovery while the Euro Area begins to slow down significantly. We think the time frame for this scenario to materialize is more likely to take place in 2H 2008," he said.
From the beginning of this year USD dropped by 7.8% from the Euro. Finance Ministers and the Presidents of the G7 central banks expressed concern on the weakening of the dollar. "Since our recent meeting many currencies have experienced instability and we are concerned about its impact on the economic and financial stability," G7 report said. The G7 called on China to intensively consolidate the yuan rate due to the country's rising trade balance and internal inflation.
"Yet, no hint of coordinated plan/intervention was given, despite the fact that they will "....cooperate as appropriate." We suspect that for any intervention to be effective, the ECB will need to soften its policy stance," Bindelli said.
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