Sudden swings in foreign exchange rates pose a threat to economic growth, European Central Bank President Jean-Claude Trichet said yesterday after the ECB kept rates on hold at one per cent.
In his strongest comments on currency volatility in almost a year, Trichet said exchange rates should reflect economic fundamentals, a pointed reference to countries intervening to keep their currencies low. The central bank head also predicted economic recovery in the Eurozone would continue in the second half of the year and said lower bank demand for ECB liquidity suggested money markets were beginning to function more normally.
That trend has pushed money market interest rates higher and put the ECB on a different path to other major central banks. Analysts expect the rift to put pressure on the euro to appreciate.