Euro gains against U.S. dollar as Trichet, politicians rally support for common currency

The euro rose against the U.S. dollar Tuesday after Europe's finance ministers rallied around the shared currency and the European Central Bank's president said financial unity wasn't endangered.

The 12-nation currency rose above US$1.23 before edging back to US$1.2294 in early afternoon European trading, still up from US$1.2276 in New York late Monday and up more than 1 cent from its eight-month low last week of US$1.2158.

An assessment Tuesday by the International Monetary Fund said a good exchange rate for the euro was between US$1.20 and US$1.30.

"Basically, we would expect some fluctuations in rates around that level, and for that not to create difficulties," said Michael Deppler, who directs the IMF's European department. "The euro needs to adjust to an average rate of around that magnitude."

In a conference call, Deppler said the euro remained strong and was benefiting from changes in the euro zone to keep it viable.

"Reforms have paid off in past, and there is no reason not to expect them to continue to pay off in the future," he said.

The euro had dropped after 'no' votes to the European Union constitution in France and the Netherlands clouded the EU's future. But at a meeting in Luxembourg, Europe's finance ministers rallied around the common currency.

"It is just inconceivable that a country could envisage dropping out of the euro," said Luxembourg Premier Jean-Claude Juncker. "The euro belongs to us all."

Analysts agreed, saying any benefit to a country that dropped the euro would only be short-term.

Though an economically weak country's departure from the European Monetary Union would leave it free to set lower interest rates and improve its competitiveness by devaluing its currency, the advantages would not last, said Joerg Kraemer, chief economist at HVB Group.

"If a country abolished the euro and pursued a policy of cheap money, bond yields and thus financing costs for the government and for companies would surge. This, in turn, would jeopardize the very existence of many companies," Kraemer said. "Foreign direct investments, which are so critical for economic growth, would dry up."

ECB President Jean-Claude Trichet said in Beijing that European financial integration would continue unabated despite the two rejections of the EU constitution.

"We are proceeding too slowly but we are proceeding with unifying the market," he told a conference of central bankers.

The British pound rose to US$1.8306 from US$1.8238 late Monday, the day Britain's government announced plans to postpone its own referendum on the EU constitution.

The dollar also fell to 106.60 Japanese yen from 106.86 yen late Monday.

The euro had risen to an all-time high of US$1.3667 at the end of last year before slowly slipping back.

Analysts have said a lower euro could benefit the countries that use it because the currency's recent strength has been sapping growth by reducing the competitiveness of European goods and services at home and abroad.

Associated Press