ECB Rate Decision and Dollar/Euro Repercussions
Today's decisions of the European Central Bank (ECB) and the Bank of England both followed plan, with no interest rate action across the board.
ECB Rate Decision and Discussion
The ECB decided to keep euro- zone area key interest rates steady, while highlighting its interest in keeping high inflation from embedding itself into the system. European bankers continue to forecast economic growth through 2008, albeit moderating. So, with inflation above 3.0% (3.3% in April), the group remains highly unlikely to cut interest rates, judging by today's statements.
Raising rates now would also be difficult, first and foremost, because of recent European economic softness. There's another reason the man on the street is more familiar with, and that's the sudden euro strength that is driving significant European instability due to inefficiencies in adjustment. The availability of cheaper U.S. goods through fluid distribution channels is causing difficulty to European producers. At the same time, European importers of U.S. goods benefit. Tourism also stands to be impacted significantly in Europe this year, as American travelers consider other options where there dollar perhaps reaches farther. Asian and European tourists are also more likely to visit the United States this year to buy the U.S. on the cheap.
It seems relatively clear to us that the ECB would like to raise rates, and will probably do so once economic activity stabilizes; and very likely once the U.S. Fed begins raising interest rates. With food and energy prices sticking high, powerful unions in Europe look to cause havoc as they seek more adequate wages for their members. The outcries across Europe, and especially in Greece where the ECB meeting took place, are deafening. Jean-Claude Trichet seems to be living within a pipe dream regarding his hopes that wage inflation will not ensue simply because he's asked member states not to allow it to. The unions in Europe do not play games, or abide by the law for that matter, when it comes to survival.
Trichet hopes to avoid inflation embedding itself into the system through rising wages and from still rigid facets of the Union that continue to allow the existence of some national monopolies with too much pricing power. At the same time, he admits energy and food prices could stick high for an extended period. Thus, his pipe dream looks to quickly develop into a nightmare.
Dollar Repercussions
Dollar enthusiasts would have preferred Trichet not mention inflation, because the simple mention of it reinforces the likelihood of future rate increases in Europe, which are damaging to dollar relative value. The recent dollar bounce was predicated on economic data flow from Europe that pointed to deteriorating euro- zone economic conditions. This week, a report on euro area retail sales showed contraction of 1.6% over the trailing 12 months through March. Americans were enjoying the likelihood of Europe joining them in the dumps, but Trichet's comments that he still sees Europe growing in '08, and that inflation is his main concern, undermined the party atmosphere.
We here at The Greek believe Trichet may have a harder job than Bernanke, considering the lengths European unions might go to in order to gain parity with rising cost of living expenditures. The European economy may hold out only as long as Trichet can keep his job under the political pressure that is likely to result and test the stability of the EU. Cutting interest rates will seem an easy way out of many problems to the politicians, and Trichet's intellectual superiority and emotional restraint may be pushed aside by panic inspired brute force. For these reasons, we see the dollar somewhat mired in a range for now, with more likelihood to strengthen than to weaken. Currency investors are also more likely to focus on internal U.S. economic developments now, as it perhaps determines the dollar's own near-term destiny.
Please see our disclosure at the Wall Street Greek website. Article should interest readers of (AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, AMEX: DOG, AMEX: SDS, AMEX: QLD).
ECB Rate Decision and Discussion
The ECB decided to keep euro- zone area key interest rates steady, while highlighting its interest in keeping high inflation from embedding itself into the system. European bankers continue to forecast economic growth through 2008, albeit moderating. So, with inflation above 3.0% (3.3% in April), the group remains highly unlikely to cut interest rates, judging by today's statements.
Raising rates now would also be difficult, first and foremost, because of recent European economic softness. There's another reason the man on the street is more familiar with, and that's the sudden euro strength that is driving significant European instability due to inefficiencies in adjustment. The availability of cheaper U.S. goods through fluid distribution channels is causing difficulty to European producers. At the same time, European importers of U.S. goods benefit. Tourism also stands to be impacted significantly in Europe this year, as American travelers consider other options where there dollar perhaps reaches farther. Asian and European tourists are also more likely to visit the United States this year to buy the U.S. on the cheap.
It seems relatively clear to us that the ECB would like to raise rates, and will probably do so once economic activity stabilizes; and very likely once the U.S. Fed begins raising interest rates. With food and energy prices sticking high, powerful unions in Europe look to cause havoc as they seek more adequate wages for their members. The outcries across Europe, and especially in Greece where the ECB meeting took place, are deafening. Jean-Claude Trichet seems to be living within a pipe dream regarding his hopes that wage inflation will not ensue simply because he's asked member states not to allow it to. The unions in Europe do not play games, or abide by the law for that matter, when it comes to survival.
Trichet hopes to avoid inflation embedding itself into the system through rising wages and from still rigid facets of the Union that continue to allow the existence of some national monopolies with too much pricing power. At the same time, he admits energy and food prices could stick high for an extended period. Thus, his pipe dream looks to quickly develop into a nightmare.
Dollar Repercussions
Dollar enthusiasts would have preferred Trichet not mention inflation, because the simple mention of it reinforces the likelihood of future rate increases in Europe, which are damaging to dollar relative value. The recent dollar bounce was predicated on economic data flow from Europe that pointed to deteriorating euro- zone economic conditions. This week, a report on euro area retail sales showed contraction of 1.6% over the trailing 12 months through March. Americans were enjoying the likelihood of Europe joining them in the dumps, but Trichet's comments that he still sees Europe growing in '08, and that inflation is his main concern, undermined the party atmosphere.
We here at The Greek believe Trichet may have a harder job than Bernanke, considering the lengths European unions might go to in order to gain parity with rising cost of living expenditures. The European economy may hold out only as long as Trichet can keep his job under the political pressure that is likely to result and test the stability of the EU. Cutting interest rates will seem an easy way out of many problems to the politicians, and Trichet's intellectual superiority and emotional restraint may be pushed aside by panic inspired brute force. For these reasons, we see the dollar somewhat mired in a range for now, with more likelihood to strengthen than to weaken. Currency investors are also more likely to focus on internal U.S. economic developments now, as it perhaps determines the dollar's own near-term destiny.
Please see our disclosure at the Wall Street Greek website. Article should interest readers of (AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, AMEX: DOG, AMEX: SDS, AMEX: QLD).
posted by The Greek | 12:00 PM
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