European Central Bank President Jean-Claude Trichet is bucking the global push toward easier monetary policy, fueling the euro’s advance just as finance chiefs convene in Washington amid concern of a “currency war.”

With the Bank of Japan this week boosting its asset- purchase plan and the U.S. Federal Reserve mulling a similar shift, Trichet said yesterday that ECB policy makers are in the “same mood” as a month ago and for now remain committed to phasing out their unlimited lending program.

That resolve propelled the euro to $1.40 for the first time since February and leaves it to shoulder the burden of what economists say is an international embrace of weaker exchange rates as nations try to boost exports. The price Trichet may have to pay is slower growth as Goldman Sachs Group Inc. and Credit Suisse Group AG warn the stronger currency is starting to hurt the European economy.

“The ECB is standing at the edge of the battlefield and is happily allowing others to fire on it without any sign of self-defense,” said Klaus Baader, co-chief European economist at Societe Generale SA in London.

The euro fell 0.4 percent to $1.3875 as of 11:09 a.m. in London. The dollar traded near the lowest level since 1995 against the yen, standing at 82.43 yen from 82.41 yen in New York yesterday.

Currency War

A week after Brazilian Finance Minister Guido Mantega complained of a global “currency war,” Trichet said markets should set exchange rates and warned “disorderly” movements in currencies can harm growth. That sets the tone for today’s meetings of the International Monetary Fund and Group of Seven as more governments intervene to weaken their currencies and the dollar falls on speculation the Fed will pursue more quantitative easing.

Russian Deputy Finance Minister Dmitry Pankin drew up his own battle lines today, telling reporters in Washington that Brazil, Russia, India and China have united to show “rather strong resistance” to attempts to make “any harsh appraisal” of currency controls.

“Countries are looking to jump-start growth any way they can,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. “The tried-and-true method of boosting trade and economic activity is to depreciate your currency, but not all countries can depreciate their currencies at the same time and this is leading to some friction.”

Currency Framework

The discord may not yet be strong enough for officials to devise a new framework for currencies. IMF Managing Director Dominique Strauss-Kahn said he doubts the “mood” exists among governments to replicate the currency accords of the 1980s.

French Finance Minister Christine Lagarde nevertheless said yesterday that France wants to “kick-start” thinking on the global monetary system and pursue greater coordination.

“I share the growing concern about the misalignment of currencies,” billionaire investor George Soros wrote in an article for the Financial Times. Talk of a currency war “is not far off the mark. It is in the currency markets where different economic policies and different economic and political systems interact and clash.”

China remains the target of the greatest criticism. Even as it boasts the fastest-growing major economy, it has limited the yuan’s appreciation to about 2 percent versus the dollar since pledging in June to make it more flexible. Trichet said it was “very important” that that vow be followed through and a “gradual appreciation” allowed.

No Future?

U.S. Treasury Secretary Timothy F. Geithner this week said a “damaging dynamic” of large economies undervaluing their currencies threatens to quicken inflation and asset bubbles, and restrict growth. “History shows that there is no future in beggar-thy-neighbor policies,” World Bank President Robert Zoellick said yesterday.

People’s Bank of China Vice Governor Yi Gang said in Washington yesterday that a major shift in the yuan would cause “social upheaval” and that the government is taking a “gradual” approach.

China’s ability to deflect criticism may be fortified by the recent willingness of Japan, Brazil, Switzerland and other nations to temper strength in their currencies through intervention.

Also undermining some exchange rates is the shift by various central banks to considering more measures to buoy their sluggish economies. Low interest rates in the industrial world prompted complaints yesterday from the Group of 24 emerging markets that their currencies are being forced higher and their economies put at risk of overheating by a flow of capital seeking returns.

‘Virtually Zero’

The Bank of Japan this week cut its benchmark interest rate to “virtually zero” and promised to help its economy by buying more assets. Fed officials are signaling they may also do more to stimulate growth and while the Bank of England yesterday held its target for bond holdings at 200 billion pounds ($318 billion), policy maker Adam Posen last week indicated he favored an increase.

The dollar yesterday fell to its lowest since 1995 versus the yen on concern the Fed’s actions will debase it.

By contrast, Trichet signaled no intention to loosen monetary policy and said the ECB will keep gradually phasing out its non-standard liquidity measures. While the ECB has phased out its 12- and 6-month loans, it still lends unlimited amounts in its weekly, monthly and three-month tenders, and has pledged to keep doing so into early 2011.

Schools of Thought

The “underlying momentum” of the economy remains positive albeit with risks “slightly tilted to the downside,” he said.

The ECB and Fed compose “two different schools of thought,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The ECB is looking at their own economy and seeing some signs of a revival. They’re very concerned about going down the line of the Fed.”

The IMF this week raised its forecast for growth in the euro area next year to 1.5 percent from 1.3 percent in July, while cutting its estimate for U.S. expansion to 2.3 percent from 2.9 percent.

The risk for the ECB is that if other central banks pump more money into their economy the resulting drop in their currencies will squeeze the euro higher, hurting Europe’s export-led expansion.

Credit Suisse analysts this week cut their outlook for European stocks in part because of the potential for a stronger euro. With exports accounting for 16 percent of gross domestic product they estimate every 10 percent gain in the euro on a trade-weighted basis reduces GDP growth by 0.8 percent, while also lopping about 11 percent off European corporate earnings given 36 percent of them come from abroad.

Overshoot?

With other central banks considering more monetary easing, the ECB standing pat means “the risk is the euro overshoots” to as much as $1.50, the analysts led by London-based Andrew Garthwaite said, adding that would also apply deflationary pressure on the so-called peripheral European economies.

Goldman Sachs this week cut its growth forecast for the euro area next year to 1.8 percent as it predicted the euro will rise to $1.55 over the next 12 months, compared with its previous forecast of $1.38.

Trichet’s comments “did serve to emphasize the chasm in the direction of monetary policy on either side of the Atlantic,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “It’s no surprise that the euro rose further.”