The President of the European Central Bank (ECB), Mr Wim Duisenberg, has welcomed the euro's recent recovery on foreign exchange markets but warned that it was too early to judge whether the beleaguered currency had finally turned the corner. Speaking in Frankfurt yesterday after the ECB's governing council left interest rates unchanged at 4.75 per cent, Mr Duisenberg said the euro remained seriously undervalued, but he declined to say what its ideal exchange rate would be.
"I am not inclined to put a precise figure on the degree of undervaluation of the euro. I simply share the feeling that the euro is seriously undervalued," he said.
In the aftermath of the decision, the euro closed up on European markets at $0.8603 and 59.39p sterling.
Signs of a slowdown in the US economy have helped the euro to recover in the past two weeks from the record lows it reached after Mr Duisenberg blurted out details of the ECB's intervention strategy during a newspaper interview. Still shaken by the storm his gaffe provoked, the ECB president yesterday refused to answer any questions about intervention in the market to boost the currency's value.
Analysts are divided over whether the ECB will increase interest rates during the next few weeks. If the central bankers believe that a further tightening is necessary, they are likely to move at the next governing council meeting in two weeks' time.
If they wait longer, they risk fuelling high wage demands when the annual pay round begins in Germany at the start of next year.
Mr Duisenberg did not rule out a further increase in interest rates before the end of this year, but he repeated his conviction that the primary causes of inflation in the euro zone were the weakness of the currency and the sharp rise in oil prices.
The ECB has consistently maintained that the euro's weakness is, above all, a consequence of the difference in economic growth rates between the US and the euro zone.
The euro-zone economy is, according to Mr Duisenberg, on course to maintain a growth rate of more than 3 per cent per annum until at least the end of 2001. He believes the most recent data from the US indicates that the American economy is heading for an orderly slowdown.
"There seems to be a normal and expected soft landing on its way in the US. It is in the interest of the entire world," he said.
The euro's recovery has come at a crucial moment for Mr Duisenberg, whose credibility has been seriously undermined by the controversy surrounding his recent remarks. He displayed uncharacteristic humility yesterday, insisting that it was too early to judge whether the tide had finally turned in favour of the euro. And, in a conciliatory gesture towards Europe's politicians, he revealed that he had changed his mind about the value of his monthly meetings with EU finance ministers.
"It has developed and is still developing towards a constructive dialogue. I increasingly perceive it as an opportunity to hear and tell what we think of them and they think of us," he said.
