Thursday, September 20, 2007

Euro / Dollar Rates

News every day this week was that the Euro is at an all-time high against the dollar. Primarily, I chalk this short-term move up to the simple and obvious interest rate differential, since the Fed cut Fed Funds and Discount rates on Tuesday. Asia followed suit Wednesday. London has announced increased liquidity availability Thursday. That leaves the ECB as the sucker-bank willing to pay the highest rates.

But the Euro's been bumping its head on records for months now. Part of the blame, of course, falls to the US. Instability, volitility, inflation fears (more on that later), recession fears, budget fears, and the overall US move away from Rubin's "strong Dollar" policy has put them on their heels, but I would think that they could have softened by now if they desired to do so. Question, then, is why they're pursuing the strong Euro.

  • Is the ECB trying to avoid inflation in the high-growth zones in Scandinavia and Ireland?
  • On a related note, does it have to do more with the steep yield curve and implication of higher future inflation?
  • Are they so focused on becoming a reserve currency that they prefer interest rate stability to economic competitiveness and consequent GDP growth?
  • Are they simply proving again that they are slow and inept? Just now buying into the "strong currency" concept which appears to have benefitted the US through the 90's?

Unfortunately for Europe (and Canada and others BTW) there is a heavy cost to the "strong" theory.

The full answer .... I leave to you!

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