ECB set to raise euro rate

The European Central Bank is widely expected to raise euro borrowing costs by a further 0.25 percentage point to 3.5% when policy makers meet on Thursday, while during the eagerly waited press conference to follow, ECB President Jean- Claude Trichet may not seem “too worried” following the single currency’s latest surge.

With the euro close to a two-year high against the dollar and at a record against the yen, Trichet is ignoring calls from French politicians, including Prime Minister Dominique de Villepin, to stem its climb.

The lack of alarm bells suggests Trichet is optimistic the eurozone economy can cope with a stronger currency, giving him leeway to keep raising interest rates next year.

Aside from repeating his standard line that “disorderly” currency moves are always unwelcome, Trichet has so far declined to comment directly on the euro’s climb.

His refusal to take a harder stance creates tension with politicians in his native France who complain he isn’t alert to its threat to growth.

Some investors are betting the stronger euro may still have an impact on policy next year, prompting them to trim their rate expectations.

Credit Suisse, ABN Amro and JPMorgan Chase expect the ECB to take its benchmark rate to 4% next year, double the six-decade low of 2005.

Barclays Capital calculates the recent move in the euro implies the ECB’s main rate being a quarter-point lower than otherwise next year. Europe‘s single currency traded at $1.3350 on Tuesday.

“The ECB should be worried about a strong euro and it should lower interest rates,” Nobel laureate Joseph Stiglitz, a professor at New York‘s Columbia University, said in an interview. “The bank will probably be passive about a strong euro even though it will mean a weak Europe.”

Next year may be the first since the euro’s 1999 birth where European borrowing costs increase as those in the U.S. fall. The Federal Reserve has left its key rate at 5.25% since June, and economists expect a cut next year.

Trichet has found political support outside France. European Union Monetary Affairs Commissioner Joaquin Almunia said there is no reason for the French to be “alarmist” about the currency’s gains, while Italian Prime Minister Romano Prodi said “the ECB is in a position to handle this transitory phase in our common interests.”

The stronger euro may also be less of an issue for European companies as many have insulated themselves from the pain of currency swings after opening factories abroad, hedging their foreign-exchange exposure and benefiting from cheaper imports.

The burden on European exporters is also lighter than suggested by this year’s gain of 12% against the dollar and 9% versus the yen. Against a basket of currencies from the bloc’s main trading partners, it has risen half that this year, with an index reaching 105.52 on November 30. In 2004, it took three months to cover the same ground and went as high as 108.30. Then, Trichet said the euro’s surge to a record $1.3666 was “not welcome” from the ECB’s standpoint.

A week ago, Market News quoting unnamed ECB officials had reported that the level at which officials would be concerned was somewhere close to $1.50, rather than $1.40, sending the euro even higher.