IMF lifts 'taboo' of supporting euro as currency hits new low

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The Independent Online

The pressure for central bank intervention to support the flagging euro grew yesterday as the single currency plunged to a fresh lifetime low against the dollar.

The pressure for central bank intervention to support the flagging euro grew yesterday as the single currency plunged to a fresh lifetime low against the dollar.

The head of the International Monetary Fund said the euro was "heavily undervalued" and that intervention should not be a "taboo" subject.

The comments from IMF managing director, Horst Koehler, came a day after its chief economist, Michael Mussa, said the weak currency was a "more a problem than an embarrassment". Mr Mussa's remarks provoked an angry reaction from the German and Portuguese governments but Mr Koehler used his inaugural news conference to show he would not bow to pressure to stay silent on the issue.

"There is no doubt that the euro is undervalued, heavily undervalued," he said. "In my view, it is also clear that intervention cannot be taboo because it is part of the instruments any central bank or government have available.

"But interventions ... have to work, and this is the issue."

A senior Japanese minister added to the speculation saying it was not clear whether the euro would recover quickly from its record lows.

Vice finance minister for international affairs, Haruhiko Kuroda, told Reuters: "The euro's movements have been deviating from fundamentals so much that it will be troublesome if it does not recover soon."

The euro dropped to a new low below $0.8440 in New York trade last night, after a keenly watched German business confidence survey suffered an unexpected fall for the third month in a row.

The Ifo index of West German business confidence dipped to 99.0 from July's 99.1. Its research chief, Gernot Nerb, said it removed the immediate need by the European Central Bank to raise interest rates. "For the time being, they should keep rates where they are," he said.

Figures showing that the US trade deficit soared to a new peak on the back of soaring oil prices failed to rally the euro. Soaring oil prices helped drive the US trade deficit to a new peak of $31.89bn in July as shortfalls with key North American, European and Asian trade partners set fresh records. The July deficit, which followed a revised $29.85bn gap in June, beat economists' forecasts for $30.72bn.

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