ECB says dollar's decline unwelcome

The European Central Bank (ECB) has described the continuing fall in the value of the dollar as "unwelcome", as the US currency plunged to its lowest ever level against the euro.

The ECB president, Mr Jean-Claude Trichet, gave no hint, however, that the ECB was considering intervening in the foreign exchange markets to bolster the dollar.

Speaking in Frankfurt yesterday after the ECB's Governing Council left interest rates unchanged at 2 per cent, Mr Trichet said that the meeting had discussed increasing interest rates, despite the soaring euro and falling growth.

"I said that we did not examine cutting interest rates. We examined the other options. Our conclusion, which was a very, very large conclusion, was that interest rates are correct at the moment I'm speaking and that continued vigilance was of the essence," he said.

The euro rose to a record $1.3383 yesterday before falling back after the news of a further rise in German unemployment and a lower euro-zone growth forecast from the ECB. The dollar also fell against the yen, dropping below 102 yen for the first time in almost five years.

Mr Trichet declined to comment on reports that the ECB had discussed a possible joint intervention in the currency markets with the Bank of Japan.

The ECB spent more than €1 billion in 2000 in an attempt to boost the European currency when it was perceived to be undervalued. The intervention had little effect and the ECB does not generally discuss such moves until after they have taken place.

The euro's rise could endanger the euro-zone's recovery by making European exports more expensive in other markets, particularly the US.

The ECB yesterday cut its growth forecast for 2004 to 1.8 per cent from 1.9 per cent and reduced its forecast for 2005 to 1.9 per cent from 2.3 per cent.

"We expect a gradual recovery in euro area activity over the next two years, with somewhat more moderate growth rates due to the impact of oil prices," Mr Trichet said.

Despite its modest growth forecast, the ECB remains worried about inflation, particularly on account of high oil prices and the rise in personal loans.

The ECB vice-president, Mr Lucas Papademos, who is a former Governor of the Bank of Greece, said that the revelation that Greece had joined the euro on the basis of false budget data was a salutary lesson that should lead to a better way of gathering and verifying statistics.