THE European Central Bank is poised to raise interest rates faster than the Federal Reserve for the first time in four decades, opening up a transatlantic policy gap that may help the euro endure the sovereign debt crisis.
ECB president Jean-Claude Trichet and his Governing Council meet next Thursday, a month since signalling a plan to increase the refinancing rate by a quarter-point from a record 1% as euro-area inflation breaches the 2% limit. By contrast, Fed chairman Ben S Bernanke and colleagues affirmed plans last month to buy $600 billion (€426bn) of treasuries through June and to keep rates "exceptionally low" for an "extended period."
That would mark the first time since at least 1971 when the rate cycle has turned tougher in Europe before the US, according to Credit Suisse. The gap may widen for another 12 months before the Fed starts to catch up, propelling the euro possibly through $1.50 from $1.42, said Gavyn Davies, chairman of hedge fund Fulcrum Asset Management.
"It’s very abnormal that they are diverging at all on rates for any period of time and also that it’s the ECB tightening before the Fed," said London-based Davies, who helps oversee about $1.5 billion (€1.05bn) of assets.
The lure of higher rates may be enough for currency traders to buy euro even as Europe’s debt turmoil continues amid speculation Portugal will seek a bailout as its 10-year bond yield trades at a euro-era record. The single currency has traded near its strongest since November following Trichet’s comments on March 3 when he surprised investors by saying "strong vigilance" is needed on prices.
That precedent is "an indication the ECB is over-reacting to the perceived inflation risk and may be making a policy mistake," said Luca Paolini, an equity strategist at Credit Suisse in London.
History shows a policy split between the US and Europe can stress financial markets, said Niall Ferguson, who teaches at the London School of Economics. Germany’s struggles with inflation preceded the collapse of the Bretton Woods system of fixed currencies in the early 1970s. The Bundesbank was attacked by then-US Treasury Secretary James Baker for raising rates in October 1987, days before the stock market crash.
The ECB’s last rate increase of July 2008 clashed with a push by Bernanke and other US officials to talk up the dollar.
Source: www.examiner.ie
ECB president Jean-Claude Trichet and his Governing Council meet next Thursday, a month since signalling a plan to increase the refinancing rate by a quarter-point from a record 1% as euro-area inflation breaches the 2% limit. By contrast, Fed chairman Ben S Bernanke and colleagues affirmed plans last month to buy $600 billion (€426bn) of treasuries through June and to keep rates "exceptionally low" for an "extended period."
That would mark the first time since at least 1971 when the rate cycle has turned tougher in Europe before the US, according to Credit Suisse. The gap may widen for another 12 months before the Fed starts to catch up, propelling the euro possibly through $1.50 from $1.42, said Gavyn Davies, chairman of hedge fund Fulcrum Asset Management.
"It’s very abnormal that they are diverging at all on rates for any period of time and also that it’s the ECB tightening before the Fed," said London-based Davies, who helps oversee about $1.5 billion (€1.05bn) of assets.
The lure of higher rates may be enough for currency traders to buy euro even as Europe’s debt turmoil continues amid speculation Portugal will seek a bailout as its 10-year bond yield trades at a euro-era record. The single currency has traded near its strongest since November following Trichet’s comments on March 3 when he surprised investors by saying "strong vigilance" is needed on prices.
That precedent is "an indication the ECB is over-reacting to the perceived inflation risk and may be making a policy mistake," said Luca Paolini, an equity strategist at Credit Suisse in London.
History shows a policy split between the US and Europe can stress financial markets, said Niall Ferguson, who teaches at the London School of Economics. Germany’s struggles with inflation preceded the collapse of the Bretton Woods system of fixed currencies in the early 1970s. The Bundesbank was attacked by then-US Treasury Secretary James Baker for raising rates in October 1987, days before the stock market crash.
The ECB’s last rate increase of July 2008 clashed with a push by Bernanke and other US officials to talk up the dollar.
Source: www.examiner.ie
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