The European Central Bank should intervene to clip the wings of the rising euro and prevent Europe from slipping into recession, the German economic think-tank IMK said on May 18. "In view of the dollar's weakness, the ECB must send a clear signal that it won't allow the euro to increase dramatically in value," IMK chief Gustav Horn said.
The guardian of the euro could prop up the ailing dollar at any time by buying dollars. And it should watch the exchange rate closely when deciding the next interest rate moves, Horn continued. "These risks have increased further. If a drastic rise in the value of the euro is not prevented, a recession in the eurozone is likely," he argued.
The ECB is widely expected to raise its key interest rates at its next policy setting in Madrid on June 8, even though the recent rise in the euro against the dollar has automatically tightened monetary conditions in the 12 countries that share the single currency. The ECB has raised its benchmark "refi" refinancing rate by half a percentage point to 2.50% since December.
The euro was changing hands at US$ 1.2792 in London on May 18.
Copyright Agence France-Presse, 2006