European Central Bank President Jean-Claude Trichet warned today against "brutal" currency market moves as the euro soars, and said the ECB was committed to keeping inflation under control after leaving interest rates at 4 per cent.
Mr Trichet - faced with opposing challenges from a soaring euro and a jump in euro zone inflation - said it had become even clearer that a strong dollar was in the United States' interests, but that the ECB stood ready to tackle inflation.
"In the recent period I have observed (currency) moves that I would say were undoubtedly sharp and abrupt, and I have said already that brutal moves are never welcome," Mr Trichet told a news conference after the ECB left rates unchanged for the fifth month in a row.
The euro hit a record high against the dollar yesterday, and later that day French President Nicolas Sarkozy told the US Congress that further dollar weakness could mean economic war.
The euro was little changed at $1.4665 after Mr Trichet's remarks. Much of its strength has been driven by the narrowing interest rate gap between the euro zone and the United States, as well as a deteriorating US economic outlook due to the supbrime mortgage crisis.
German Finance Minister Peer Steinbrueck said the ECB's rate decision fitted with current situation, and would potentially affect the euro's strength against the dollar.
The ECB must tread a tightrope between avoiding fuelling rapid dollar depreciation and sounding tough on euro zone inflation, which at 2.6 per cent is well above the ECB's target and at its highest level in over two years.
"The sharp increase is a matter of particular concern," Mr Trichet said. "We will do what is necessary to continue to solidly anchor inflation expectations."
Part of the inflation rise was due to an unfavourable though transitory past-year comparison, but around 0.2-0.3 percentage points was due to rising food and oil prices, he added.
Overall inflation risks were to the upside, while headline inflation was likely to remain above the ECB's 2 per cent ceiling into 2008.
"The ECB clearly remains very much in 'wait and see' mode. Nevertheless, there appears still to be a tightening bias in its policy stance," said Howard Archer, chief European economist at consultancy Global Insight.