Central bank teamwork has its limits

By Brian Love - Analysis

PARIS (Reuters) - Central banks surprised the world this week with the first concerted plan to avert financial market paralysis since the September 11 attacks in 2001, but a co-ordinated approach to other issues such as the dollar's weakness is not on the cards.

While the measures announced on Wednesday might help to prevent the credit crunch that took hold in August from jamming up short-term funding markets as year-end approaches, that's about as far as the consensus goes.

Central banks are pulling in opposite directions on interest rates and look hellbent on avoiding any confusion between their monetary policy role and their responsibilities for making sure markets function properly.

And there is little sign of fusion on exchange rate policy despite mounting concern in the euro zone that dollar and Asian currency weakness is getting dangerous.

European Monetary Affairs Commissioner Joaquin Almunia said this week it was time for a new international currency consensus but he admitted that getting there was far from a given.

Marco Annunziata, chief economist at UniCredit bank, argues that the divergent interest rate tracks of the ECB and Federal Reserve are justified, but that the case for co-ordination on exchange rates is building.

"I think we are now much closer to the stage where a common response will come because everyone's incentives are becoming aligned," he says. "Nobody wants a dollar meltdown."

The dollar hit an all-time low versus the euro on November 23 at just short of $1.50 per euro and has lost nearly 10 percent in six months.