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FX Research - Juncker and Trichet Cry Euro

Euro/dollar at 1.60 after G7 met April 11 and issued its first remarks directed at major currency misalignment since September 2000 and surely the market is wrong…well that is what Juncker and Trichet would have us believe this week as the two cried euro after the single currency hit a record low against the dollar this week.  Okay we are now at 1.5680, well off the high, but the “urgency” in the voices of Juncker and Trichet still suggests dismay over the euro and warrants my attention…especially as I think the dollar’s bounce versus the euro is unlikely to prove sustainable until the ECB signals a readiness to consider easing rates. 

 

Why are euro cries from Juncker and Trichet so empty? 

 

To begin with the framing of the issue is disingenuous.   G7 and this week Juncker and Trichet have framed their currency concerns around excessive volatility.  Everyone knows that it is not the pace of the rise in euro/dollar that is troubling G7 (European members) but the level of the euro.  But framing currency concerns around levels is a higher order concern and demands a higher order of agreement…which was clearly lacking at the April 11 meeting in Washington.  Also framing currency concerns around levels (not a specific target but as in a severe overshoot) implies a greater desire to intervene in the market buying dollars.  So if you say volatility when you mean level how can anyone take the warning seriously?

 

Then there is the context that Juncker and Trichet crying takes place…ECB officials flipping out over inflation and so much so that Noyer and Mersch this week even said rates may need to be hiked to check medium-term inflation pressures.  Noyer was quick to claim a Kosovo moment of being misinterpreted and revoked the rate hike threat.   However if inflation is really causing the ECB to pop sleeping pills at night then a high euro is just what the doctored ordered…especially in light of rising commodity prices.  What about exports?  Well what about them?  They are holding up…thank you very much Asia and Eastern Europe

 

But even if you think Noyer was puffing up the reality at the Bank, all of his colleagues think the IMF is too pessimistic on Euro Zone growth and not happy with the IMF identification of scope for easing – no rush of course.  Simply crying about the euro while remaining rigidly focused on inflation and upside risks is inconsistent and until the ECB admits that the credit crisis in Europe and the US slowdown are dragging more than Spain and Ireland down, then no one is going to take euro/dollar (euro/stg, euro/yen and euro/yuan) threats seriously. 

 

From what I can tell the Euro Zone position at G7 was the weak dollar, not the strong euro, was the problem and the Fed was going overboard on easing while the Bush administration was not standing behind its strong dollar mantra.  For the record it is hard to recall a G7 meeting when the European members did not blame any imbalance or wickedly economic problem on the US policy mix…surely not completely without merit.   The US position essentially was it is our currency and your problem…also not a unique response (confidence in markets getting the exchange rate right in time and reflecting strong longer-term US fundamentals). 

 

ECB inflation hardliners got a whiff of what is coming in the Belgium business and German business sentiment indexes for April the last two days.  The world economy is heading into an extended period of sub-trend growth if not outright contraction.  We will have forgotten about ECB intransigence on interest rates by the summer. 

 

Until then it is hard for me and I suspect anyone to take the ECB and Eurogroup seriously when they whine about the euro (dollar) and any relief the euro finds will come from the Fed putting the brakes on rate cuts next Wednesday. 

 

David Gilmore

 

 

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