And So It Begins ...

by Claus Vistesen

cross-posted from Alpha Sources

The dust has barely settled from Bernanke’s decision to lower the US Fed funds rate to 4.75% which has subsequently taken the EUR/USD to new heights in the +1.40 range before an all too common game has commenced in the Eurozone. Of course, there is nothing controversial about the falling Dollar as such regarding the immediate fundamentals of the Fed's decision but I still think it would be wise to notice what is going on in the Eurozone since after all this is not only a story of a falling greenback but also one of a rising Euro; currencies come in pairs you know. As such and as could perhaps have been expected the ECB is already under considerable fire. On the one hand the pressure is mouting from economic fundamentals themselves where news was dished up today that all measures of business and consumer confidence as well as real manufacturing growth are surely but steadily trending down. One the other hand and perhaps even more interesting is the fact that political interests are already positioning themselves according to the current environment which seems to have broken in a new ceiling for the EUR/USD. Of course and almost on queue the French President Nicolas Sarkozy was quick on the mark* …

``When the U.S. central bank lowers its rates, everything picks up; when we don't lower ours, we go down,'' Sarkozy said in an interview with TF1 and France 2 television stations. ``I'm telling Mr Trichet, `look at what others are doing'.''

Apart from Sarkozy we really also need to look towards poor Italy where the situation of course now is becoming somewhat of a desperate one since there is not a lot of slack to draw upon;

Luca Cordero di Montezemolo, chairman of Fiat SpA and leader of Italy's manufacturers, urged the European Central Bank to halt the euro's rise because it's hurting exports.

``The super euro worries us, we ask for the government and the ECB to do something,'' Montezemolo said late yesterday in Rome after employers' lobby Confindustria presented its latest growth forecasts. ``We don't want to give anyone any lessons but this could become a problem for exports.''

Now, the interesting thing here is not so much the fact that Sarkozy actually chose to pounce at this particular point in time since we all know that this is not the first time. The interesting thing however is that Angela Merkel (the German chancellor) chose to stay as the faithful squire (Sancho Panca perhaps?) to Trichet’s continous vigilance against inflation in exclaiming that …

``We will resist any attempt to challenge the central bank's independence,'' Merkel said at an event in Frankfurt last night to mark the German Bundesbank's 50th anniversary. The ``slightest suspicion'' that Europe is in two minds about the ECB's freedom from political interference ``would threaten the euro's stability,'' Merkel said.

Even the former Fed chairman Alan Greenspan who seems to have an awful lot of time on his hands at the moment weighed in on the debate;

Former Fed Chairman Alan Greenspan also weighed into the debate, saying Sarkozy will fail to persuade the ECB to cut interest rates. Sarkozy is ``wrong on this particular question,'' Greenspan, 81, said in an interview yesterday. ``I don't think he will succeed.''

This is where we then move into something of a peculiar situation. As a first and immediate point I couldn’t agree more with Angela Merkel and Alan Greenspan. The whole point with having a central bank is that it is independent and that it thus sets policy independently from national and regional interests. There can be absolutely no doubt about that and in this light alone Sarkozy’s and even Luca Cordero’s remarks are bridging a gap which is essentially un-bridgeable in a modern economy. However, this reservation, important as it may be, is also becoming something of a hollow chant at this point in time. In this light and dare I say it, Sarkozy’s advice that Trichet should ‘look at what others at doing’ seem to be a very sound piece of advice at this point. Alas, this then has the potential to become the situation which none of us wants it to be. As such and although I am sure Sarkozy’s and Cordero’s intentions are good they might end up solidifying the ECB on a path of rigidness and assertiveness regarding exogenous pressure and thus halt the making of decisions which, I am afraid, is becoming more and more clear as the economic data keeps on rolling in.

* All quotes above are taking from Bloomberg.