The USD, the Fed and the ECB

Just as in the foreign policy sphere, where "diplomacy" in French actually means "appeasement", in economic policy words do not mean what they appear. The French are calling for "vigilance" on monetary policy, when what they really mean is "intervention" in the sense that they want a policy shift now dammit. The falling dollar is giving the export dependent European economies, and thus their political leaders, fits and had been for sometime. The European Central Bank is helping the process along with its inflation combat tactics of rising interest rates. The ECB has been raising rates in tandem with the US Fed for well over a year now and Jacques Chirac has been screaming over the missed opportunity to allow the US to outpace Europe in raising rates and thus pursue a mercantilist tack. Not much has changed.

I'll forgo a prediction on the USD as I've been wrong more than I've been right on that score, but I will make a prediction for 2007. The current state of the Euro will be a BIG problem for European growth in the year ahead and it will bolster the export side of the US economy and provide a buffer for slowing housing and any waning consumer activity (although I maintain that a retreating consumer is still a theory and not a fact). I am not a proponent of a weak dollar policy, but a weakening dollar is inflationary and just now is perhaps a relatively painless necessity to get the Fed off the fence and hawkish again over inflation. This weighs in favor of those who say the next rate move by the Fed is up, not down.