Last updated: February 5, 2013 7:34 pm

Hollande calls for managed exchange rate

French President Francois Hollande (L) addresses European Parliament deputies at the EU parliament©AFP

François Hollande set France on course for a clash with Germany after calling for the eurozone to manage its exchange rate in the strongest warning yet by a senior European leader that the euro’s strength could damage the recovery.

“The euro should not fluctuate according to the mood of the markets,” the French president told the European parliament in Strasbourg on Tuesday. “A monetary zone must have an exchange rate policy. If not it will be subjected to an exchange rate that does not reflect the real state of the economy.”

He insisted he was not calling for the European Central Bank to set an exchange rate target, but he said reform of the international monetary system was “indispensable”.

Mr Hollande’s call drew a swift rebuke from Germany, which has long opposed active exchange rate intervention.

Chancellor Angela Merkel and Wolfgang Schäuble, German finance minister, have both spoken out in recent weeks to warn Japan against interfering with the monetary policy of the Bank of Japan and deliberately weakening the exchange rate of the yen.

Speaking on a visit to Paris, Philipp Rösler, Germany’s vice-chancellor and economy minister, said the eurozone’s top priority must be “strengthening competitiveness, rather than weakening the currency”.

But Mr Hollande said France was among those single currency countries whose efforts to improve their competitiveness could be “destroyed by the rising value of the euro”.

“The eurozone must, through its heads of state and government, decide on a medium-term exchange rate,” he told a press conference. “We need to act at an international level to protect our own interests.”

The pace of the euro’s rise, which last week traded above $1.37, has alarmed some policy makers and European companies.

Investors have returned to the eurozone in force this year on increasing optimism that the worst of the crisis is over. The ECB’s decision in January not to cut interest rates gave the euro a further boost in currency markets.

“Europe . . . is leaving the euro vulnerable to irrational movements in one direction or the other,” Mr Hollande said.

The single currency has risen nearly 4 per cent against the dollar this year to trade near a 15-month high and is at its strongest rate against the Japanese yen since April 2010. LVMH, the European luxury company, warned last week that a strong euro could hurt its business.

Currency traders and investors have become cautious of the euro’s recent strength, however. A warning at the weekend from Pierre Moscovici, the French foreign finance minister, sent the euro lower on Monday, while concerns over political stability in Spain and Italy have also led the single currency to fall from its recent highs.

Speculation has grown that the ECB could face questioning over the euro’s rise when it meets on Thursday, with investors on high alert for any signs the central bank could factor the strength of the euro into its economic outlook for this year.

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