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EScroogeJr (< 20)

First cracks in European economic edifice



February 10, 2008 – Comments (3)

As I pointed out in December, the rumors of the dollars's demise have been greatly exaggerated. My argument was that the dollar will remain a viable currency, not because of Bernanke's dubious talents, but because other currencies are in even worse shape (except China's). And now, lo and behold, the mighty Euro is about to give up the ghost. 

 "Feb. 7 (Bloomberg) -- European Central Bank President Jean- Claude Trichet signaled that he's open to cutting interest rates for the first time in almost five years, saying there's ``unusually high uncertainty'' about economic growth. ``As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy,'' Trichet told reporters in Frankfurt today after the ECB kept its key rate at 4 percent. The euro fell and bonds rose following his remarks."

3 Comments – Post Your Own

#1) On February 10, 2008 at 6:04 AM, MakeItSeven (31.54) wrote:

That does not mean much other than the EU is forced to cut rates for their exports to remain competitive.  If all fiat currencies try to race to the bottom then gold/commodities will shine, not any of those currencies.

Anyway, the EU is at least reluctant to cut rates compared to the reckless attitude of the Fed.  That should give people more trust in it, all things consdered:

"The possibility that OPEC would make an active decision to price oil barrels in a currency other than the dollar has been bandied about, but never spoken of by anyone with any real power. That changed today, after OPEC Secretary-General Abdullah al-Badri was quoted in the Middle East Economic Digest, saying "maybe we can price the oil in the euro."

The weakened dollar has eroded the purchasing power of the oil-rich nations at a time when consumers in those countries are also dealing with growing inflation risks, in part because several prominent nations, such as the UAE and Qatar, maintain currency pegs to the U.S. dollar. Inflation has been rising in those countries, but these countries have been lowering interest rates in order to keep pace with U.S. policy, even though they have very different fundamentals.

Eventually, those pegs are likely to be abandoned. "The days of the peg are numbered as these nations can't continue to cut rates to 3% with inflation 4 times that rate," says Ashraf Laidi, head of currency strategy at CMC Markets. "They will need to revalue the peg and change it to a basket of currencies."

When this 1974 OPEC dollar pricing agreement is finally abandoned, the US Dollar's foundation as World Reserve will be yanked out from beneath it."

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#2) On February 10, 2008 at 2:26 PM, EScroogeJr (< 20) wrote:

MakeItSeven, my point is that Europe cannot sustain exchange rates above 1.5. Whatever OPEC (aided and abetted by Bush, Congress, banks, Federal Reserve - you name it) does to make the euro go up and the dollar go down, after a short-term spike the euro will retreat to this range, either because of the efforts by central bankers to devalue it, or because of Japanese-style recession prompted by the loss of competetiveness.

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#3) On February 10, 2008 at 3:59 PM, dwot (29.28) wrote:

Yup, Europe is in trouble too. 

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