- Selective focus

- The ECB joins up

- Australia in reverse

After weeks of unremitting bad news from the United States economy and an exceptional response from the Federal Reserve, all of which failed to harm the dollar, a few discrete hints from the European Central Bank that the continental scene is not perfect and the euro falls out of bed. As we have noted before, when traders have made up their minds they will find the information to support their view and then act upon it.

The new ECB policy was welcomed by European politicians. Christine Lagarde the French Finance Minister noted, The change in the language of the ECB marks a more valid assessment of the situation. Michael Glos the German Economics Minister said that the apparent neutral shift of the bank was appropriate. The market assumption that the ECB would have to move to a neutral rate stance has proven true.

However, the euro is not going to break out of the range it has held against the dollar since November until the second leg of the assumption, that the ECB will actually reduce rates, comes closer to reality.

In the United States the current poor economic state has lost emphasis for the currency market. Even if first quarter GDP is negative it will not harm the dollar. Attention is shifting to the economic situation in second and third quarters when the recovery is expected to take hold. But until there is a sign of returning growth a substantial rise in the dollar is unlikely. The euro climb has been blunted by the decline in European economic activity, but that is not enough for the dollar recoup its losses. The expectation is that the Eurozone will slow considerably and that the US will begin to show signs of recovery. Either development will suffice to boost the dollar, but traders will not extend the recent move higher in the usd without supporting evidence. The baseline forecast for the two largest economic zones has the changed with the potential advantage to the dollar. But it remains potential. The world’s two main currencies will continue to move in a narrow range against each other until the new assumption gathers proof.

Central Banks

European Central Bank

No change in the refi rate, but a major change in bias. The ECB’s own words express it best. Downside risks to growth have increased. Where have we heard that assertion before? Or Mr. Trichet's words, 4.00% allows price stability. Interesting. We have been hearing exactly the opposite of that for the past several months as ECB governor after governor has warned of inflation and that the bank would, if necessary, raise rates to contain inflation. The market heard what it wanted and expected to hear from the ECB and promptly sold the euro for more than two figures. Despite all of their recent rhetoric the vote to hold rates was unanimous, with no call for an increase or a decrease of rates. There is no doubt the softer language of the statement and the press conference was approved unanimously also. It seems the hawks have flown the roost.

Bank of England

The Monetary Policy Committee cut the repo rate by 25 basis points to 5.25%. Prospects for growth abroad have deteriorated and disruptions to global markets have continued,’ said the accompanying statement. The governors also cited tightening credit conditions and that CPI at 2.1% in December was close to the 2.00% target. The move had been expected by a large majority of surveyed economists, but the bank worked to keep the lid on expectations for future reductions. The statement noted that food and energy prices will boost inflation in coming months but will fade later in the year.

Reserve Bank of Australia

Citing strong consumer demand and significant inflationary pressures the central bank raised the cash rate 0.25% to 7.00% as expected. The accompanying statement maintained a preemptive anti inflation tone, but with global growth set to slow and other central banks cutting rates or on hold, future increases are under doubt.


The Bank of Japan and the ruling Liberal Democratic Party officials both downplayed the possibility of Japanese rate cuts despite the gathering rate reduction mood in other industrial world central banks, said sources quoted by Market News International.