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Trichet Says Strong Dollar Is ‘Extremely Important’ (Update1)

By Gabi Thesing and Christian Vits

Sept. 28 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said a strong dollar is “extremely important” for the world economy and it’s too early for the ECB to unwind emergency stimulus measures.

“In the present situation it is extremely important that we can have in the framework at the level of global finance and the global economy a strong dollar, as the authorities in the U.S. are saying,” Trichet told lawmakers in Brussels today. “The solidity of the dollar is very important.”

Trichet’s comments come after a 15 percent slide in the dollar against the euro since February that’s threatening to hamper Europe’s recovery from the worst recession since World War II. With the Group of 20 nations pledging to rebalance the global economy away from a trade deficit in the U.S., the risk for the ECB is that its economy feels the pain of further dollar adjustment.

The euro fell from $1.4661 to as low as 1.4627 after Trichet’s remarks.

“It would be premature to declare the crisis over,” Trichet said. “Now is not the time” for the ECB to unwind its stimulus measures. “However, at some point in time an exit strategy will have to be implemented. The ECB has an exit strategy and stands ready to put it into action when the time comes.”

Non-Standard Measures

The Frankfurt-based central bank has lowered its benchmark lending rate to a record low of 1 percent to fight Europe’s worst recession since World War II. It is also employing “non- standard measures” to get credit flowing through the economy again, lending banks as much money as they need at the benchmark rate and buying covered bonds.

“The euro-area economy shows signs of stabilization,” Trichet said. “In the period ahead we expect to see a very gradual recovery.”

The ECB this month predicted economic growth in the 16- nation euro region of about 0.2 percent in 2010, revising a June forecast for a 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months earlier.

G-20 leaders concluded a summit in Pittsburgh on Sept. 25 promising to pursue policies that bring the world economy into greater balance. That initiative may require the dollar to fall further so as to narrow the U.S. trade deficit, according to economists at Morgan Stanley.

Dollar’s Dominance

Trichet’s comments came the same day that World Bank President Robert Zoellick said the U.S. dollar’s dominance as the world’s main reserve currency will be challenged as the financial crisis reshapes the global economy.

“There is every reason to believe that the euro’s acceptability could grow,” Zoellick said. “Of course, the U.S. dollar is and will remain a major currency. But the greenback’s fortunes will depend heavily on U.S. choices” on inflation, the budget deficit and financial oversight, he said.

U.S. Treasury Secretary Timothy Geithner last week defended the dollar’s role as the world’s reserve currency. The U.S. has a “special responsibility” to preserve confidence in its financial system and “sustain the dollar’s role as the principal reserve currency in the international financial system,” he said Sept. 24 in Pittsburgh.

Trichet also urged banks to accelerate lending to their economies. The global recession has made banks reluctant to lend and also eroded demand for debt. In Europe, loans to the private sector rose 0.1 percent in August from a year earlier, the slowest growth since records began in 1991, the ECB said last week.

There’s a “gradual improvement in financing conditions which is expected to support demand for credit in the period ahead,” Trichet said. “It is for this reason that the Governing Council continues to regard ECB interest rates as appropriate.”

“Our message to banks is clear: do your job,” he added.

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