ECB in spotlight as France warns against euro strength

The European Central Bank sat down for its regular policy meeting here Thursday amid a fresh debate over whether the euro's recent strong rise poses a threat to recovery in the single currency area.

The euro, which late last week rose to its highest level against the dollar in more than a year, was holding steady at around $1.35 ahead of the meeting.

The central bank always insists it has no exchange rate target.

But France has triggered a debate this week that a strong currency could trample the still tender green shoots of recovery in the euro area, even as Germany insists there is no cause for alarm just yet.

The 23-member governing council is not expected to vote in favour of any new policy moves -- either in terms of interest rates or anti-crisis measures.

With ECB interest rates currently at a record low of 0.75 percent and its latest anti-crisis bazooka -- the so-called OMT -- ready and primed for action, central bank chief Mario Draghi believes the bank has already done its utmost.

But with data tentatively suggesting that the eurozone could finally be emerging from its three-year-old sovereign debt crisis, the euro's recent rise will likely be the focus of attention, analysts said.

On Tuesday, French President Francois Hollande called for the eurozone to manage the euro's exchange rate.

Speaking to European Parliament in Strasbourg, Hollande said "a single currency zone must have a foreign exchange policy otherwise it will see an exchange rate imposed on it (by the markets) which is out of line with its real competitive position."

But Berlin says there is no cause for concern, arguing that from an historical point of view, the euro is currently not overvalued and that the recent rise is a counter-reaction to the massive depreciation in the wake of the eurozone crisis.

German officials argue that the euro's rise is a good thing since it shows that financial markets' confidence in the single currency is returning.

ECB watchers say Draghi will tread a cautious line on exchange rates at his regular post-meeting news conference.

"We see rates on hold today, and do not expect Draghi to 'talk the currency down' as the euro strength mostly reflects an improved outlook," said analysts at UniCredit.

Commerzbank economist Lutz Karpowitz agreed.

"By now no analyst expects the ECB to cut rates today as recent data from the eurozone was too positive for that to be the case. As a result the debate about the recent euro strength, initiated mainly by France, has therefore become the centre of attention," he said.

Karpowitz calculated that the euro has risen by around 15 percent in value since last July, which is "really nothing exceptional. Companies have got used to the current levels as well."

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