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Trichet Tries to Throw the Euro a Curve Ball

By    |   Monday, 09 May 2011 08:02 AM

Central bankers watch exchange rates like a hawk. It’s one of the things that determine if a country “has the wind to its back” or if the economy has ankle weights strapped on it.

Well, as EUR/USD started toward 1.50, European Central Bank President Jean-Claude Trichet knew he had to try to do something to trip-up the euro’s rise versus the dollar because traders were starting to treat it like a no-brainer, one-way bet.

So during the recent ECB interest-rate meeting, Trichet took the time to strongly hint that interest rates would be held steady for a meeting or two.

This alone tripped up traders that had fully expected the ECB to continue its rate hikes in the very near-term.

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But then Trichet went a bit further. He literally took the time to read some of the Federal Reserve’s statements and Tim Geithner’s statements about their “strong dollar policy,” etc.

It’s clear that Trichet is trying to “talk down” the euro from its lofty heights. A euro that becomes too strong is apt to hurt the growth of their economy that is only coasting along right now at 0.3 percent on a year over year basis. Folks, that’s almost “stall speed.”

Then once Trichet got through pulling his tricks, Greece started pulling some of their own.

Late on Friday, as the market volumes were starting to thin out, they made some comments that alluded to them pulling out of the euro. Now that isn't likely to happen at this point at least … but it was one more effective way for the euro to be jolted downward as another “shock” came its way.

It seems they are all doing anything they can to get the euro heading downward. They have to kill its strength if they stand a chance at not slipping back into negative GDP readings.

In fact, just as proof of the need for a cheaper exchange rate I’d like to share with you what the Operation for Economic Cooperation and Development research (OECD) said: A 10 percent increase in the euro saps euro-area growth by 0.7 percent in the following two years.

Now the euro has only moved up by about half that much since November … but that would still take a bit out of their GDP of about 0.35 percent over the next two years on a year over year basis. So if their GDP is presently growing at 0.3 percent and just the high exchange rate alone could take that much away … it would be enough to put the eurozone back into a recession.

So Trichet and really every leader in the euro area have an incentive to try to “talk down” the euro.

The EUR/USD pair broke a near-term uptrend line as of Friday. So if the euro continues to hold below those levels on Sunday evening and Monday, then they may very well have done enough to reverse the trend of the euro. We’ll see.

Once trend lines break, many computerized programs kick into gear and start selling the euro.

So watch this pair closely over the coming days to weeks and you’ll see if they got their wish or not.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.
 

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Central bankers watch exchange rates like a hawk. It s one of the things that determine if a country has the wind to its back or if the economy has ankle weights strapped on it. Well, as EUR/USD started toward 1.50, European Central Bank President Jean-Claude Trichet...
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2011-02-09
Monday, 09 May 2011 08:02 AM
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