European finance ministers encouraged the euro's decline from a record against the dollar and France's Christine Lagarde said the currency may be overvalued by as much as 20 percent.
"The developments we are observing are pointing in a better direction than those we have observed before," Luxembourg's Jean-Claude Juncker told reporters in Brussels late yesterday after leading a meeting of euro-area counterparts. Lagarde said an exchange rate of $1.55 "is still at 10 percent, 15 percent, 20 percent above the appropriate fundamentals."
The euro has fallen 3.8 percent since reaching a record $1.6019 on April 22. Finance ministers from the Group of Seven nations said in Washington on April 11 they were concerned about "sharp fluctuations in major currencies" and their "possible implications for economic and financial stability."
The euro has surged 14 percent against the dollar in the past year as the Federal Reserve slashed interest rates in a bid to stave off a recession in the world's largest economy. The European currency traded 0.3 percent lower at $1.5427 at 11:45 a.m. Brussels time today.
The Fed has cut its benchmark rate by 3.25 percentage points since September. The European Central Bank has held its main rate at 4 percent over the same period as surging food and oil prices sent inflation to a 16-year high in March.
Inflation will remain "high" for some time, ECB President Jean-Claude Trichet said May 8, signaling the central bank is in no rush to lower borrowing costs in the euro region.
The U.S. downturn accelerated in August after the market for subprime home loans in the U.S. collapsed, prompting banks around the world to shun lending as they reported losses or writedowns of more than $330 billion since the start of 2007.