–The Euro...The New World Currency?

Super-euro may spark a currency war while French battle the ECB
By Ambrose Evans-Pritchard

The euro has reached an all-time high against the yen and surged to $1.35 against the dollar, setting the stage for a battle between French politicians and the European Central Bank for control of the currency.

Jean-Claude Trichet, the ECB's president, gave a virtual guarantee that interest rates would be raised again to 4pc in June, narrowing the yield gap with the US. "I would not say today anything aimed at changing expectations for the month of June," he said.

Global currencies are going through a major realignment as Europe takes over as the engine of world growth and the US starts to trip, setting off an exodus from dollar assets.

In parallel, hedge funds have renewed bets on the "carry trade", borrowing in Tokyo at rock-bottom rates to reap higher returns across the world. The Australian dollar, viewed as the best barometer of the carry trade, touched an 18-year high against the yen yesterday after a near vertical rise over the past month.

"This isn't about yields any more: the carry trade is driving everything," said Simon Derrick, currency chief at Bank of New York.

The global system is not adjusting in an orderly fashion because Asia's main currencies are fixed or managed, leaving Europe to bear the full brunt of the dollar slide. The Chinese yuan tracks the dollar, while the yen has depreciated by more than 60pc against the euro since 2001, the result is near-zero rates in Japan.

advertisement"What worries me is that this could lead to currency wars. China's reserves have reached $1.2 trillion (£606bn), that's up $200bn since November. This could be the catalyst for conflict if handled badly," he said.

Germany is strong enough to withstand the pain of a 'super-euro', but first-quarter data shows Toyota making inroads into the German market while Volkswagen sales were down 12pc.

"Club Med" economies are far more vulnerable. The IMF forecasts that Germany will enjoy a current account surplus of 5.3pc of GDP this year, but Spain will have a deficit of 9.4pc. "The North-South divide is growing all the time. France is starting to feel the pinch," said Julian Callow, Europe economist at Barclays Capital.

Nicolas Sarkozy and Segolene Royal, the two leading candidates in the French elections, accused the ECB of crippling industry through monetary overkill.

Mr Sarkozy has vowed to launch a "diplomatic offensive to create a European economic government that can face down the bank. "I want the Europeans to be able to do with the euro what Americans do with the dollar and the Japanese with the yen. The euro doesn't belong to Mr Trichet,'' he said.