FRANKFURT, Germany - The European Central Bank took a baby step yesterday toward intervening in world markets on behalf of the downtrodden euro, using its foreign reserves to buy up $2.5 billion worth of the currency and briefly halting its tailspin against the dollar.
Wim Duisenberg, president of the central bank, insisted that the move was little more than a routine portfolio adjustment and that "intervening in the market was not part of the motive." But currency analysts said the bank was hoping to prop up the currency, or at least protect it from tumbling even further.
The central bank has seemed increasingly powerless to reverse the euro's decline. Since it was introduced in January 1999, the euro has lost nearly one-quarter of its value against the dollar, falling from $1.17 to about 87 cents. Central bankers and political leaders have tried to talk up the euro's value, arguing at every opportunity that the currency's low exchange rate does not reflect Europe's fundamental economic health. The central bank has also raised interest rates six times in the past year, also to little avail.
Intervention in the markets, by selling dollars and buying euros, is one of the few tools not yet tried. But most of Europe's central bankers view intervention as a futile effort, given that trillions of dollars flow across borders every day. The chances of success are particularly low given that the United States and Japan have shown no appetite for joining in an intervention.
Indeed, some analysts predict that the euro could slip even further in the weeks ahead. Jesper Dannesboe, chief foreign-exchange strategist at Dresdner Kleinwort Benson, went so far as to warn about the risk of a "panic sell-off" because many investment funds are holding euros that they had bought at prices well above current ones. He predicts that the euro will slip as low as 80 cents on the dollar by early next year.
In its move to buy euros yesterday, the central bank said it had simply decided to sell the accumulated interest it had earned on foreign reserves since it went into operation at the start of 1999. In itself, the $2.5 billion shift is not enough to have any lasting effect on currency markets. More aggressive European economists have argued that the bank should be selling off some of the reserves themselves, a much more radical move.
Despite Duisenberg's insistence that the bank is not intervening in markets, many traders were convinced that the bank did want to send the markets a signal. For one thing, it was the first time that the bank has ever sold off the money it has earned from foreign investments. Beyond that, the bank took the somewhat unusual step of announcing the move with a written statement.
At a news conference after a meeting of the central bank's governing council, Duisenberg insisted the move was not an "intervention" but admitted that he was "not disappointed" when the euro climbed briefly in response.