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MNI (London)
--Current Euro Levels, Volatility Not An Issue: Eurosystem Source
     LONDON (MNI) - Although current forex levels are not a source of concern to
the European Central Bank, euro volatility is a factor that could jeopardise
meeting inflation targets in the short run, and that calls for additional
prudence in recalibrating monetary policy, a Eurosystem source told MNI in
exclusive comments.
     "The exchange rate outlook can put a downward pressure on inflation and
therefore constitutes a critical element that the ECB's Governing Council is
closely monitoring," the source said.
     Despite stressing that the ECB was nearing its target of securing a
sustained return of inflation rates towards levels that are below, but close to,
2%, negative repercussions from the exchange rate could impact on the exact
timing.
     "We are confident that our set inflation objective will be met though it is
not yet clear when exactly in the short run, and looking at the current exchange
rate curve, this pushes us to be all the more prudent in avoiding an abrupt
unwind of monetary policy ahead of time," the source said.
     --CURRENT LEVELS FINE
     According to the source, at present levels the euro-dollar exchange rate
pattern "is not a source of concern and if it stays this way I believe it will
not cause any significant issue".
     A problem would arise in the longer run, however, if the exchange rate
becomes uncontrolled, with the risk of triggering a bubble on forex markets
caused by a potentially excessive euro appreciation.
     This is why the ECB's communication can play a major "buffer" role.
     "Given the high sensitivity of forex markets to monetary policy
announcements it is paramount that the ECB's communication be prudent, aimed at
avoiding such a risk, even if the scenario's evolution also largely depends upon
the Federal Reserve's moves," the source noted.
     The source argued that even if the euro exchange rate is not among the core
objectives of the ECB's mission, it can nonetheless have significant
repercussions on the transmission of monetary policy and, ultimately, on
reaching price stability.
     "All developments that are not triggered, and therefore controlled, by
macroeconomic factors can make it harder to reach our goal in the short run,"
the source said.
     In the last year, the euro has risen more than 15% against the dollar,
making oil imports into the euro zone cheaper with the effect of keeping core
inflation low.
     --INFLATION JAWBONING
     But if the ECB can do nothing "directly" against an uncertain exchange rate
outlook, explained the official, it can play a significant "indirect" role in
giving emphasised attention to the euro appreciation effects on defining an
exact schedule for the quantitative easing (QE) tapering.
     "Prudence means also taking into account that the QE exit remains
conditioned to several factors -- mainly the eurozone outlook and reached
inflation targets -- and that if these are not met, monetary policy must
continue to be accommodative," the source said.
     No date has yet been set for QE's termination: "It could happen in
September, or beyond that date, in any case we will cross that bridge only once
we get there," the source added, stressing that the QE exit must be "soft and
gradual", not hard.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
[TOPICS: M$E$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$,MN$FX$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com