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Central banks must be on guard against currency wars, says ECB's Coeure

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[May 27, 2014]  PARIS (Reuters) - Central banks need to cooperate to avoid a currency war, European Central Bank policymaker Benoit Coeure said on Friday, and the ECB should take account of the euro's exchange rate in its monetary policy deliberations.

Speaking in Paris, Coeure also said that cutting the ECB's deposit rate into negative territory was a policy option for the bank but would not be an exchange rate policy.

In a speech on "Currency wars and the Future of the International Monetary System", Coeure asked whether, from the ECB's perspective, central banks should take account of exchange rates in monetary policy; whether there is a currency war now; and whether international cooperation is needed in this regard.

He replied "Yes, but it's complicated," to the question of whether central banks, in the ECB's view, should look at the exchange rate.

Answering the question of whether there is a currency war, he said: "No. But it may come, so we need a framework for cooperation to prevent it occurring."

The G20 doctrine of avoiding competitive devaluations was still being respected, Coeure told a conference in Paris organized by the Fondation Maurice Allais, adding this situation was a "positive sum game" for the world economy.

Coeure stressed that the ECB's Governing Council had been unanimous in agreeing its willingness to use conventional and unconventional policy instruments, if needed.

Reuters reported last week that the ECB is preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms. [ID:L6N0O05MM]

"It is an option," Coeure said of the negative deposit rate, which would essentially see the ECB charge banks for holding their money overnight, adding "this is not exchange rate policy."

As interest rates would remain low for a long period of time to protect the euro zone recovery, the risk of asset 'bubbles' arising would increase and this would require determined use of national macroprudential policy instruments to counter them, he said.

(Reporting by Paul Taylor and Paul Carrel; Editing by Mark Trevelyan)

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