Euro at 10-Month High Poses Economic Threat, Juncker Says

The euro’s 8 percent gain against the U.S. dollar in the past six months is posing a fresh threat to the European economy just as it shows signs of escaping the debt crisis, said Jean-Claude Juncker, who leads the group of euro-area finance ministers.

Echoing policy makers from Switzerland to Japan in bemoaning strong exchange rates, Juncker late yesterday called the euro’s value “dangerously high” after the 17-nation currency this week traded above $1.34 against the dollar for the first time since February last year.

The euro has rallied amid growing signs in financial markets that the three-year debt turmoil is fading and after European Central Bank President Mario Draghi last week signaled no immediate plan to ease monetary policy further.

“It was said last year that the euro zone was at risk of breaking and I said last year that this won’t happen,” Juncker, who steps down this month as head of the so-called eurogroup, told an annual gathering of business leaders in Luxembourg. “The euro zone has become more stable after lots of efforts, some from me,” Juncker said, adding that now “the euro foreign-exchange rate is dangerously high.”

The European currency dropped as much as 0.9 percent after Juncker’s comments and reached an intraday low of $1.3262. It reversed declines after ECB Governing Council member Ewald Nowotny said the euro-dollar rate is not a concern and traded at $1.3322 at 11:13 a.m. London time, up 0.1 percent on the day.

Longer-Term Trend

“One shouldn’t overvalue short-term fluctuations of exchange rates,” Nowotny said today in Vienna. “I don’t see a perspective of a longer-term trend, therefore it is from my point of view not a matter of major concern.”

Juncker’s remarks reflect European Union policy makers’ confidence that they have tamed the fiscal crisis. EU President Herman Van Rompuy said on Jan. 9 that “the worst is behind us, particularly the existential threat to the euro.” The ECB’s Draghi on Jan. 10 cited “positive contagion” in European markets and said “a gradual recovery should start” in the euro-area economy in late 2013.

Harvard University professor Martin Feldstein, long a critic of the euro, said on Jan. 5 that European policy makers should consider a coordinated approach to weaken the euro as a way to rally growth via exports.

“A lower euro would make each of the euro-zone countries more competitive relative to the countries outside the euro zone,” Feldstein said.

Weaker Currencies

Policy makers from many of the world’s leading economies have entered the new year advocating weaker currencies as an impulse for stronger economic growth with monetary and fiscal policies running out of room. Switzerland is already blocking the franc’s appreciation against the euro, while newly elected Japanese Prime Minister Shinzo Abe’s campaign to spur growth and seek a more aggressive central bank has driven down the yen.

Bank of England Governor Mervyn King said on Nov. 14 that while he never called for changes in exchange rates, sterling’s increase over the previous year was “not a welcome development.” The Bank of Canada said on Dec. 4 that “persistent strength” in its dollar was hobbling exports.

Before it's here, it's on the Bloomberg Terminal.