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Tuesday, 19 September, 2000, 14:53 GMT 15:53 UK
IMF calls for euro intervention
Michael Mussa
Michael Mussa's advice was rebuffed by the Germans
Now is the time to intervene in the financial markets and support the single European currency, according to the International Monetary Fund.

"The markets have pushed the euro somewhat too low relative to fundamentals," IMF chief economist Michael Mussa said in Prague on Tuesday.

"Circumstances for intervention are relatively rare, but they do arise," he added. "One has to ask if not now, when?'"

The euro had hit a fresh record low earlier on Tuesday, when it dipped below $0.85. It has fallen 27% since it was launched 20 months ago.

The currency is now hovering above $0.85.

Mr Mussa also hinted that interest rates in the eurozone should also rise. He added the European Central Bank (ECB) could signal that monetary policy in the euro area could be "supportive of official intervention to attempt to correct some of the excessive depreciation of the euro."

Mind your own business

However, European member states so far have shown little appreciation of Mr Mussa's interest in the fate of the currency.

Bundesbank's Ernst Welteke holding some of the last print run of Deutsche marks
Bundesbank's Ernst Welteke says intervention is an option
"Michael Mussa should concentrate on his job instead of giving his advice to the European Central Bank," a German government source said at a briefing.

The IMF is unlikely to heed this advice, given Mr Mussa's warning that a weak euro is not just a European problem but a global one.

The strength of the yen could slow the fragile Japanese recovery by making its exports more expensive. As well, the strength of the dollar against the euro may also worsen the US current account deficit, he warned.

US uncertainty

Mr Mussa's remarks follow earlier comments from Bundesbank president Ernst Welteke that the currency was clearly undervalued and that intervention was an option.

But markets have so far remained sceptical about the possibility of intervention to support the currency.

Experts say that for intervention to be most effective, it would have to be co-ordinated by central banks, including the US Federal Reserve. There is scepticism that the US would be reluctant to jeopardise its strong dollar policy.

"It's not exactly what the US has an interest in doing prior to the election," Joe Prendergast, head of global currency strategy and research at Credit Suisse First Boston, said.

This view was lent support by comments from Federal Bank president Robert McTeer on Monday that the euro's weakness could be good for Europe as it may stimulate growth there.

"The absence of intervention, of course, doesn't necessarily mean it goes further down, but certainly the euro is not going to find it very easy to get any official support and the flow of funds is very much against it," Mr Prendergast added.

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See also:

14 Sep 00 | Business
ECB warns markets on euro
11 Sep 00 | Business
Euro crashes to fresh low
12 Sep 00 | Business
Duisenberg: euro 'out of line'
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