ECB Policymakers Warn on Growth, Currencies

European Central Bank policymakers said Europe's growth outlook was deteriorating and warned of the risks attached to "brutal" currency movements after the euro hit new highs against the dollar on Friday.

The euro fell back after Bank of Spain Governor Miguel Angel Fernandez Ordonez said the slowdown of the euro zone economy in the wake of the U.S. mortgage debt crisis was likely to be worse than originally thought.

"It's highly probable that (world market tensions) will end up slowing down growth rates by more than expected," Ordonez told the Spanish parliament. "The data accumulated since the beginning of this episode are still too scarce to clear up uncertainty about what its final effect will be," he added.

Ordonez also spoke of inflation risks and the ECB's "complete commitment to act whenever necessary" to head them off, but markets focused on his downbeat growth assessment which knocked the euro off an early session high of $1.4966 according to Reuters data. By 1515 GMT the euro had slid back to $1.4801.

ECB President Jean-Claude Trichet said "brutal" currency movements could hurt growth but Bundesbank President Axel Weber, who is known as an interest rate hawk, said the ECB may still need to tighten rates further somewhere down the line.

"Sharp currency movements are not in favor of global growth and I don't welcome brutal moves. This is what I have said, I don't withdraw any of it," Trichet told reporters in Frankfurt.

Most analysts expect the ECB to hold rates at 4 percent through 2008, despite an inflation rate which hit 2.6 percent in October, well above the bank's 2 percent reference ceiling, and is seen staying above 2 percent for much of next year.

Weber, speaking at the same event as Trichet, said it was important that despite price shocks from food, oil and energy, "inflation expectations have remained close to our objective."

He added that "as monetary condition ease, and there are still inflation risks ... we may need to tighten rates further." The remark was ignored by markets, unlike similar warnings of possible future rate hikes made by Weber in the past.

Growth prospects have dimmed since a strong third quarter, with oil prices rising above $98 per barrel, the euro scaling new peaks on a trade-weighted basis and three-month money market rates well above the ECB's reference rate of 4.0 percent.

"It is apparent to everyone that the longer these market tensions last, the greater the effect on the confidence of families and companies in the area," Ordonez said.

U.S. Pain to Spread

In the latest indication of slowing activity, the euro zone composite purchasing managers' index fell back in November, with a drop in the dominant service sector PMI to a 27-month low outweighing a modest rise in manufacturing.

"The (Ordonez) comments re-emphasize that while the market has been preoccupied with U.S. economic weakness, the United States is not alone in suffering and the euro zone will struggle or at least decelerate next year as well," said Jeremy Stretch, market strategist at Rabobank.

The European Commission chimed in with the same message as Trichet on the euro's surge against the dollar. "The recent and ongoing sharp exchange rate movements are unwelcome," a spokesman for Economic and Monetary Affairs Commissioner Joaquin Almunia said.

However, markets don't seem to be listening and analysts are wondering whether, and at what point, the ECB and the Federal Reserve will intervene directly on markets to try to stem the euro's rise.

Trichet said markets should recognize the improved strength of the Japanese economy and reiterated his comments, made most recently in Paris on Thursday, that he noted the United States' authorities have said a strong dollar is in U.S. interests.

European exporters are becoming increasingly concerned by currency trends, with Germany's aerospace coordinator Peter Hintze the latest to sound the alarm on Friday.

"The dollar's weakness is a serious problem for (European planemaker) Airbus," he told Reuters in an interview.

Gernot Nerb, research director of Germany's Ifo institute, told reporters in Frankfurt: "The euro is already fundamentally overvalued and the dollar is undervalued."