By: Christopher Lewis
While the rest of the Western world has been in a low-rate environment, the one outlier has been the ECB. Europe has been mainly concerned with fighting inflation, and as a result has actually raised rates twice since the financial crisis of 2008 abated.
However, over the course of the last few months, the EU has seen its economy falter, and there are real concerns of recession in Europe. In fact, on Monday we saw rumors in the marketplace of the ECB reconsidering the recent covered bond purchase program in order to alleviate some of the pressures in countries like Italy, Portugal, and of course Greece. This has led to speculation that the ECB is considering another rate action soon – but this time in reverse.
With the next month’s meeting being the last of Jean Claude-Trichet, there is little likelihood of him leaving the helm on a rate cut, but the cut could be coming shortly after. JCT is known as an ultra-hawk, and it is unlikely he is willing to end on that note. With the rate cut, this would certainly work against the Euro as the one main thing it has over the Dollar is the interest rate.
As it cuts, the detrimental effects will be somewhat muted as there are many other central banks around the world that are cutting simultaneously. In fact, Monday saw the Israeli Central Bank cut by 25 bps to a 3% rate. The Americans are nowhere near raising rates, and have even put a timeline on it – 2013. The Bank of England is struggling with a weak economy at home, and there is even talking of quantitative easing in that country. Because of this, the world will be looking for some kind of return on investment, and as such – the trading community will probably buy Dollars by default, as they buy US Treasuries for a lack of any other choice. (Better to have some return, than none at all.)
With the other rates being so low, it will help the Euro stay a little more afloat because of all of the other problems around the world. No, if the Euro falls – it won’t be the rates that cause it, but rather many other ominous problems in Europe. Government defaults, banks going under, and recession – there are far more issues in the EU than a simple rate cut.