European Central Bank President Jean-Claude Trichet warned on Thursday against "brutal" currency market moves as the euro soars, and said the ECB was committed to keeping inflation under control after leaving interest rates at 4 percent.
Trichet - faced with opposing challenges from a soaring euro and a jump in eurozone inflation - said it had become even clearer that a strong dollar was in the United States' interests, but that the ECB stood ready to tackle inflation.
"In the recent period I have observed (currency) moves that I would say were undoubtedly sharp and abrupt, and I have said already that brutal moves are never welcome," Trichet told a news conference after the ECB left rates unchanged for the fifth month in a row.
The euro hit a record high against the dollar on Wednesday, and later that day French President Nicolas Sarkozy told the US Congress that further dollar weakness could mean economic war.
The euro was little changed at $1.4665 after Trichet's remarks. Much of its strength has been driven by the narrowing interest rate gap between the eurozone and the United States, as well as a deteriorating US economic outlook due to the supbrime mortgage crisis.
German Finance Minister Peer Steinbrueck said the ECB's rate decision fitted with current situation, and would potentially affect the euro's strength against the dollar.
The ECB must tread a tightrope between avoiding fuelling rapid dollar depreciation and sounding tough on euro zone inflation, which at 2.6 percent is well above the ECB's target and at its highest level in over two years. "The sharp increase is a matter of particular concern," Trichet said. "We will do what is necessary to continue to solidly anchor inflation expectations."
Part of the inflation rise was due to an unfavourable though transitory past-year comparison, but around 0.2-0.3 percentage points was due to rising food and oil prices, he added.
Overall inflation risks were to the upside, while headline inflation was likely to remain above the ECB's 2 percent ceiling into 2008. "The ECB clearly remains very much in 'wait and see' mode. Nevertheless, there appears still to be a tightening bias in its policy stance," said Howard Archer, chief European economist at consultancy Global Insight.
Eurozone economic growth was likely to continue around its potential rate, although financial market turbulence had increased uncertainty and downside risks, Trichet said.
"Sustained real economic growth experienced in the euro area in the first half of 2007 has continued through the third quarter," he said. Italian employers' group Confindustria said on Thursday that risks to growth were increasing and European trade unions called on the ECB to cut interest rates to ward off a slowdown.
Nonetheless, some economists had expected Trichet to give a hawkish message on inflation to control the public expectations which drive wage and price setting - in part because it could be some time before the economy is strong enough for higher rates.
Three-month interbank lending costs remain above 4.5 percent, pushing up corporate and household borrowing costs, three months after credit market turmoil sparked by the US subprime mortgage crisis first hit Europe.
These higher borrowing costs, combined with uncertainty about export demand, have damaged industrial confidence as measured by eurozone purchasing managers' surveys. In September ECB staff forecast growth slowing to 2.3 percent next year - still in line with the eurozone's 2.0-2.5 percent long-term trend - from an estimated 2.5 percent for 2007.