Duisenberg: euro 'out of line'

The euro has fallen 27% since it was launched 20 months ago

The president of Europe's central bank, Wim Duisenberg, has described the single currency as "seriously undervalued".

We have created a climate that makes it now possible for the euro area as a whole to confidently expect a period of economic growth of more than 3% for at least three years

Wim Duisenberg

On the currency markets, the euro fell to a new historic low of $0.8553, some 27% below the level when it was launched in January 1999. At the end of the day it had recovered to just over $0.86.

Giving his quarterly testimony to Members of the European Parliament, Mr Duisenberg said the exchange rate was "clearly out of line with [economic] fundamentals".

Mr Duisenberg shrugged off criticism that the single currency was a failure: "The euro to my mind is the success that we hoped it would be."

To intervene, not to intervene - Wim Duisenberg is keeping his cards close to the chest

"We have created a climate that makes it now possible for the euro area as a whole to confidently expect a period of economic growth of more than 3% for at least three years."

Low inflation

Inflation, the main worry of central bankers around the world, was under control in the eurozone, he insisted.

Driven by higher oil prices, inflation is currently running at 2.4%, above the European Central Bank's (ECB) goal of 2%, but according to Mr Duisenberg these "short-term price pressures" have not yet triggered long-term inflation.

He said the euro's falling value was "clearly a cause for concern", but insisted that the eurozone's rate inflation was "among the lowest in the world".

No intervention

Currency analysts are closely watching any pronouncements from the ECB for hints of intervention on the financial markets.

The president of the European Commission, Romano Prodi, told a German magazine that he was in favour of a concerted intervention of the central banks of Europe, Japan and the United States.

Such action could push up the euro, but if it fails speculators would stand to make a fortune - just as they did when sterling was forced out of the European exchange rate mechanism in 1992.

For this very reason Mr Duisenberg refused to even talk about intervening on the markets.

But after persistent questioning from European legislators he said the euro's current weakness was not one of the "exceptional circumstances" that would justify intervention.

But he warned speculators: "The instrument [of intervention] is available, but I cannot discuss it before I use it."