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The Olympiad of Central Banks

by: Markos Kaminis August 06, 2008 | about stocks: EWG / EWQ / EWU / FXB / FXE / IEV    
Markos Kaminis

Markos Kaminis

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In a prelude to the Olympic Games, this week offers the challenge of the central banks, as the American Federal Reserve [FED], European Central Bank [ECB] and Bank of England [BOE] make key decisions on interest rates.

The Olympics begin this week, with the always-spectacular opening ceremony kicking festivities off on Friday. However, with currency exchange activity affecting a multitude of other key economic catalysts, like for instance the dollar price of oil and the relative price of goods and services in Europe and the U.S., this week's Olympiad of Central Banks might prove even more exciting.

Last time out, the ECB followed through on long-tossed threats of rate hike. With euro-zone inflation getting testy, Jean-Claude Trichet was pushing against angry unions, member states, and a harder place, potential recession. The appreciation of the euro against the dollar was a nice thing for a while, until it starting getting nasty in its effects. It gave Europeans great buying power, and many real estate aficionados in my neighborhood seem to think it has been foreign demand that has kept values in place in the city that never sleeps as well.

However, back home in Paris, Roma, Berlin and Athens, American made goods easily delivered all over Europe have stolen market share and put Union manufacturers and retailers into economic siesta. Therefore, when unions began threatening for wage increases that would embed inflation into the system, Trichet had no choice but to act. He had to act anyway, as inflation rated well above 3% this year.

He perhaps held off making his long-discussed rate hike, probably at the desperate pleading of the U.S. Federal Reserve Chief. Indeed, if the ECB began raising rates whilst the American Fed was still cutting them, the dollar may have been doomed, and we have a "strong dollar policy" you know. In their last meeting before this Tuesday, the American Fed kept rates unchanged and announced future rate hikes were in store to combat inflation. Statement alone was enough to preserve the dollar, even when the ECB raised rates.

The European Chieftain was steadfast in soft-speak to support the dollar that day. He said this move was in no way a tip-off to what he might do next time around, which is this week. Since then, emerging market decline, along with intensifying European economic concerns, have many expecting no rate change is in store. If so, that may leave the dollar standing on the gold medal platform.

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This article has 5 comments:

  •  
    Aug 06 09:13 AM
    Confusion reins and no one knows what will happen. The Fed has lost contact with inflation in its fear of the recession taking away the American punch bowl before the elections. None of that Please! Will then what to do? I suspect nothing just as they indicated. One vote to keep the strong dollars crowd cheering, but we know it will not happen. What is next? The death plunge into the fall months when bonds prices will climb and interest rates on housing loans fall. I suspect gold will do well as the dollar is seen to be frail on weak export numbers. No pretty.
    Reply
  •  
    Aug 06 01:15 PM
    I don't think that the currency support via rate hikes is a viable option.The FED should get the credit for being attentive to economic deceleration by easing.In fact the dollar weakness that followed,had likely deflected severe contraction(recession) that the market bears assisted by the CNBC pseudo economists had claimed was upon us .ECB had made a different choice as it continued to raise rates while facing decelerating economies.Now as the economic implosion is about to devastate Europe(Emerging market economies as well),ECB will have to lower rates at a drastic pace in the period ahead.
    Basically the currency trend is set-dollar is heading for a Mega rally .That rally will be fuelled by the geometric explosion in demand for the dollar assets (which have to be paid by the dollar).At this time ,the FED can even afford to ease in order to further facilitate economic recovery -it is the ECB that had committed a serious monetary/economic error.
    Let the others "jockey"for a strong currency.
    It makes no difference as in the period ahead the dollar will rule -at least par to Euro.
    Unfortunately the volatility will continue bit longer.
    Reply
  •  
    Aug 06 01:44 PM
    Whether the Euro zone CUTS rates, or the US belatedly raises them, won't make muhc of a difference. Would be nice to see BOTH. Our rates are TOO low..trying to bail out promiscuous lenders and unqualified borrowers. A surge in the dollar would collapse commodity prices, causing funds to flow into productive investments, and spur on world economic growth.

    cyclingscholar
    Reply
  •  
    Aug 06 01:55 PM
    Are American products really stealing European market share? Does the US still have enough factories to do that? Or are they really Chinese product with US labels????
    Reply
  •  
    Aug 06 02:23 PM
    well, the Japanese are commiting massive harakiri to the Yen AGAIN, so it will not be short of liquidity for the elections rally, if Trichet is hanged, more flows to NY, at the end the athletes are running for a golden metal, you know what I mean...
    Reply
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