Thursday, January 12, 2006

Euro Update - Trichet Is Hemmed In

I've blogged on the Euro vs. the USD a number of times (here and here for example). Throughout November I was highlighting the tension between sensible monetary policy and what the politicians would like to see happen. Europe has to take economic goodies where it can find them today and the likes of Chirac and Berlusconi would like to see further erosion in the EUR to spur more exports (to be specific, erosion versus the USD, because the US economy is humming and can afford lots of European goodies, from wine to airplane parts) and it was looking good for them in December as the EUR fell to about $1.17. However, Jean-Claude Trichet over at the ECB has to be on the lookout for inflation, thus he raised rates last month. You could almost hear the groans out of the Palace Elysee and other seats of power in Europe as the currency markets caught a whiff of competitive rate hiking with the US and the Euro rebounded.

Well, Trichet came out today and admitted just how constrained he is. The margin for error in monetary policy is razor-thin given Europe's economic situation and he must tread ever so lightly. This further illuminates the difficult situation that the EUR is in, the political forces are arrayed against it and now we have confirmation from the source that monetary policy is shoehorned into an accomodative bias. To me, this would bolster the argument for a structural trend down for the Euro.

Bloomberg has the story.


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