Banking on a dollar rally

The stakes could not be higher in the deadly combat between soaring oil prices and the greenback

What of the militantly anti-inflationary European Central Bank in all of this? If US Treasury secretary Henry Paulson was counting on help from Europe and co-ordinated support through G7 to help a sustained dollar rally, he would have been disappointed. Earlier this year, it looked a reasonable bet that the ECB, faced with mounting evidence of a deepening economic slowdown, would follow the US Fed in bringing interest rates down.

But expectations here, too, have changed sharply, coinciding with the change in the US stance over the dollar. In early June, at the same time as the US was seeking a dollar rally, Trichet declared that the ECB’s Governing Council was in a state of ‘heightened alertness’ over inflation. This was widely interpreted to mean it was poised to raise rates. ‘I don’t say it’s certain. I say it is possible,’ he added by way of clarification. It still pushed the dollar sharply down against the euro.

To add to the sense of disarray, Yves Mersch, a member of the ECB Governing Council, subsequently declared a eurozone rate rise was a ‘possible certainty’. Whatever was that supposed to mean? The phrase ‘possible certainty’ must surely now merit a page of its own in the Bumper Book of ECB obfuscation. More seriously, the failure of recent rounds of G7 and G8 meetings to effect any real policy co-ordination must call into question that global financial architecture on which Gordon Brown has placed so much reliance.

So what does all this suggest about the future direction of the dollar, the euro and sterling? A discomforting truth in all of this is that the oil price is out of the control of central banks and finance ministers. America’s authority has also been visibly weakened as its economy has slowed, with some of its leading investment banks dependent on sovereign wealth fund support. Adding to the uphill task for the dollar is the US Presidential election and uncertainty over changes in policy emphasis that a new administration will bring.

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Phi1 Edinburgh

July 14th, 2008 10:54am Report this comment

With the current crisis in American banks and mortgage providers the US Government will be taking on billions of mortgage debt - which means the dollar is going to fall not rise!!!!

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