ECB cooperation to maintain dollar's strength
The European Central Bank and its president Jean-Claude Trichet have been posturing with the mission to fight inflation by maintaining and not dropping ECB interest rates relative to the recent sharp drops by the Fed. It has contributed to a weakening dollar. Food price and oil price inflation, exacerbated by the weak dollar, have become high profile topics that make the ECB stance look unkind. Once the dollar's slide reached $160 per euro, the ECB shifted posture today:
"We're concerned about the possible implications for financial and macroeconomic stability," Trichet told reporters, according to Dow Jones Newswires. He added that it's "very important" that U.S. authorities have said a strong dollar is in the country's own interest.The remarks came after the euro hit a record high against the dollar Tuesday of $1.6020.
"Is it a coincidence that the change in tone came after the euro breached $1.60, and that so many ECB members are taking a less hawkish tone? We think not," wrote Win Thin, senior currency strategist at Brown Brothers Harriman.
The dollar is now (as of 4/23 11:30pdt) $1.5670 per euro, and oil and gold prices are dropping again. I've always believed the world central banks will cooperate in keeping the dollar strong
to prevent a US economic collapse that would potentially take down the
rest of the world. It has given the markets (Dow up 160) some optimism
today to see ECB cooperation, and a signal that the financial players understand we're all in this together.
Note that for the ECB to "support" the dollar they'd need to lower rates, which would be 100% counter to their concern about inflation. I think their point (warning), ahead of the next fed meeting, is that the US can't continue to lower rates -- they believe it is time for the US to start fighting inflation, even if it hurts housing and the economy.
The gold bugs essentially believe the US doesn't have the political will to do this, and will instead allow inflation to rise as a method of deflating the staggering US debt (including housing) away.
Despite the recent downward move in gold in anticipation that the US might take a tougher stance on inflation, it still seems like their is a lot more politcal concern over hurting the economy or housing than inflation. Until politicians are more concerned about th rising prices of food and energy than falling house prices it seems the gold bugs are more likely to be making the right call.
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Thx Sean, this article in today's WSJ (attached in its entirety) suggests that the ECB will be embarking on an easing cycle while the Fed may have hit bottom on its easing cycle and may reverse course. The article implies what you posit - the sentiment on the spread between the Euro and $ interest rates looks like it will shrink.
There seem to be two extreme opinions about commodities... the $7 per gallon of gas theorists (in tandem with commodity inflation) and those who believe commodities are in a bubble due to speculation. What you say about the Fed's current obsession to right the economy and housing via lower rates is on target so I would expect commodity prices to remain elevated.
An Endgame for the Euro?
Joanna Slater reports:
Days after the dollar touched a new nadir against the euro -– indeed, one euro briefly fetched $1.60, a symbolic milestone -– the beleaguered buck is enjoying a bounce.
Some even saw a parallel to politics. “Just like Hillary Clinton, when all seemed bleak, USD staged an almost improbable recovery,” wrote David Watt, a currency strategist at RBC Capital Markets late Thursday.
By this morning, one euro bought about $1.56.
Of course, the dollar has had many such minor rebounds, and they always turn out to be short-lived. Several currency experts, however, see a hint that something different might be happening this time around.
Much of the euro’s recent invincibility stems from two factors. One, economic growth in the euro zone has been remarkably impervious to events in the U.S. Two, the U.S. Federal Reserve has embarked on a dramatic campaign to cut interest rates, undermining the appeal of short-term investments in dollars, while the European Central Bank has held its rates firm.
Now two small cracks have appeared in that armor. On Thursday, Germany’s IFO survey of business sentiment came in lower than expected, indicating deteriorating conditions in Europe’s largest economy. At the same time, some investors believe that the Fed will cut its key rate next week but then take an extended pause, stabilizing the gap between U.S. and European interest rates.
If bad news out of Europe starts to accumulate and the Fed stands pat, the dollar’s slide could taper off. However, that’s probably not the end of the dollar’s travails.
“What’s the endgame?” says Art Steinmetz, a bond portfolio manager at OppenheimerFunds. “The ECB goes into an easing cycle at about the time the Fed is going into a hiking cycle.”
That’s still months away (if not more). But some are keeping a very close eye on the horizon.
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Interesting article, I had missed it. I remember people telling me that the euro would >never< go over $1.35, that the ECB simply wouldn't allow it. Clearly the Euro being so high puts them at a terrible competitive disadvantage (think Airbus vs. Boeing), so it is not surprising there is pressure for them to ease. Will be interesting to see if they succumb to the same political pressures we have here. Hopefully someday our elected leaders figure out that if we continue to go for easy today, it makes things harder tomorrow.
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Great article, I'd think they would have a great interest in helping the dollar along and am glad to hear that they're actively trying to strengthen the dollar.
It's good for us that the world depends on our success - hopefully it stays that way for sometime.
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