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Dollar's fall worries Europeans

FRANKFURT, Germany — The chief political spokesman for the euro has added his voice to demands that the United States make a greater effort to curb the dollar's steep fall, which could lead to a tense Group of 7 meeting this month in Washington.

Jean-Claude Juncker, who heads the group of finance ministers from the 13-nation euro zone, criticized what Europeans perceive as indifference in Washington toward its trade policies and budget deficits, which many economists say are contributing to the intense downward pressure on the dollar.

"Europe cannot be the area of the world's economy that will bear the consequences of others' inaction," Juncker said late on Monday, Reuters reported.

The statement from Juncker, who generally avoids speaking about exchange rates, was the latest evidence that European discomfort with the euro was spreading beyond France, where complaints about the currency's strength have increased since the election of President Nicolas Sarkozy.

The euro closed Tuesday at $1.415 after peaking at nearly $1.43 late Monday in New York.

In Europe, frustration is rising over the lack of effective tools to slow the euro's appreciation, which could eventually hamper economic growth by making European exports more expensive to customers outside the euro zone.

The European Central Bank, focused on inflation risks, appeared intent on maintaining its course of higher interest rates at its meeting on Thursday. That would offer little relief to the euro and might even accelerate its rise.

American officials seem content to let the dollar decline, and there is believed to be little prospect of an agreement to reverse that stance when the G-7 finance ministers and central bankers meet in Washington Oct. 19.

"The Europeans are having a one-way conversation with themselves," said Stephen Jen, head of currency research at Morgan Stanley in London. "And really, only the European politicians, not even the central bankers."

Juncker, who is also prime minister and finance minister of Luxembourg, cited "global imbalances" as his main concern, an allusion to last year's $850 billion deficit in the U.S. current account, a broad measure of the trade deficit that includes capital flows. That deficit has put downward pressure on the dollar for years, because of fears that investors might stop providing Americans with the money to continue their import binge.

The jury is still out on whether the euro zone countries can reach a common position on currency policy when they meet next Monday, especially since Germany, their largest member, has been notably reluctant to wade into the matter.

Even if the euro zone countries can find a single voice, the United States seems certain to resist any effort at the G-7 to ease the dollar's decline.

To date, the United States has experienced mostly the benefits of the weaker dollar in the form of a slowly declining trade deficit since late 2005. Also, bond market data suggests that foreigners are still willing to hold American assets even as the dollar edges downward.

"In words, we have a strong-dollar policy," said Michael Woolfolk, senior currency analyst at Bank of New York Mellon in New York. "In action, we have a policy that favors a stable dollar in the form of a slow, steady decline."

The euro's rise also reflects differentials in interest rates in the United States and the euro zone — a fact that makes euro-denominated assets more appealing. That, too, shows little sign of changing.

When the Federal Reserve in the United States cut its benchmark rate by half a percentage point in September to combat both financial market instability and the weakening American economy, it put the United States on a very different path from the euro zone.

Though the European Central Bank has postponed one rate increase, it is still signaling that it sees inflation as the greater risk, which means it is more likely to increase borrowing costs than to hold them steady in the coming months.

Some currency traders have nursed hopes that the bank would shift its stance at its meeting on Thursday and would decide that the strong euro and the credit squeeze that has developed from the collapsing American mortgage market are damping inflation.

Last week, senior bank officials publicly played down the prospect of that change in direction, saying that the strong euro had not harmed growth and that the effects of the credit crisis remained uncertain.