Reply #22: After giving up on BoJ intervention, now hoping for ECB intervention (haha [View All]

[UpInArms]

All eyes on ECB after U.S. rate rise

http://www.menafn.com/qn_news_story.asp?StoryId=CqB_e0eiemZuXnefSBgv5zxnVBKvdqMfMD

FRANKFURT, Dec 15 (AFP) - Following the rate increase by the US Federal Reserve, which put US interest rates higher than in the eurozone for the first time for three years, all eyes are on the ECB to see what steps it takes to curb the strength of the euro, analysts said on Wednesday.
On Tuesday, the US Federal Reserve raised short-term interest rates for the fifth time in a row, boosting the federal funds target rate by a quarter percentage point to 2.25 percent. Furthermore, the Fed promised further tightening in 2005 to head off inflation. It is the first time since April 2001 that borrowing costs in the United States have been higher than in continental Europe -- the European Central Bank's "refi" refinancing rate has been stuck at 2.0 percent for the past one and a half years.

In theory, higher rates in the US should underpin the dollar which has fallen heavily this year. Higher US rates make dollar-based investments more appealing to foreigners, bringing in more foreign investment and helping the US to finance its trade and budget shortfalls, at least in the short term. But the dollar got only a modest lift from Fed's decision on Tuesday, which had been widely priced in by the markets. And by Wednesday, the euro was back above 1.33 dollars after slipping to 1.3291 dollars late Tuesday, as market attention switched to focus on the upcoming release of new US Treasury data detailing international portfolio capital flows in October.

Analysts were now looking to see whether enough money was flowing into the US to span the country's yawning twin current account and budget deficits. It is the size of those deficits that has been behind the dollar's long slide -- and the accompanying upward surge in the euro -- in recent months rather than perception that the eurozone economy is performing better than the US economy. The rise and rise of the euro is showing signs of braking the sluggish recovery in the 12-country eurozone, recent data suggests, triggering calls on the ECB to clip the single currency's wings. One of the so-called German "five wise men", a panel of independent experts advising the government in economic matters, urged the ECB in a newspaper interview this week to intervene directly on the foreign exchange markets to curb the soar-away euro. "Forex intervention by the ECB should very much be considered -- more so than a cut in interest rates -- if the euro continues to rise sharply," the head of the wise men, Wolfgang Wiegard, said.

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