My Take on the ECB: Head Fake?

I have an alternate theory as to Trichet’s comments about ECB considering raising rates. Look at European banks; raising interest rates just does not seem very healthy (click to enlarge images):

Perhaps the talk about raising rates was a head fake in order to cajole the Fed to begin raising theirs; rather than getting the Europeans to do our dirty work of strengthening the US dollar by de-valuing the euro, Trichet may have been trying to get the Fed to do it on their own. 

The last Fed meeting yielded no change, as expected. Conventional wisdom dictates against raising interest rates in an economic downturn, but it appears that one of the major catalysts for the downturn is energy prices. Regardless of whether or not the ECB raises, lowers, or maintains its interest rates, it is the opinion of this author that the Fed raises theirs to show that talk about strengthening the US dollar is more than just rhetoric.

Comments

[Dan Walker:]

The ECB is in the same position as the Fed; can't do anything without screwing up. They raise rates, they tank their weakest members; they raise rates, and Germany bails and brings back the Deutchmark. Germany holds the bulk of the US$ EU reserves, so they are already being bent over courtesy of the strong Euro. Add Germany to Ireland's recent rebellion and bye bye EU. Option 2 would be good for the US. What do you want to bet the ECB sits on their hands?

2008 Jun 27 07:20 AM

[Dan Walker:]

Doesn't seem to be an edit button. Should read "They raise rates, they tank their weakest members; they lower rates, and Germany bails and brings back the Deutchmark

2008 Jun 27 07:23 AM

[dieuwer:]

Eurobashing again...

2008 Jun 27 08:27 AM

[Melancholy ...:]

Dan's right. Tricky's gonna raise rates once ("it's not a series of rate hikes, etc etc). Then what? The US and Europe are both on the cusp of a major recession. Does the ECB eventually start cutting? Or are they going to attack inflation and cause widespread economic misery, in the name of discipline and austerity? How much pain can the people take?

I'd like to buy far out of the money options, like 5 delta, on the euro going away in five years.

2008 Jun 27 09:27 AM

[semar:]

just to be sure, why do you think the ECB should be very interested in banks? They allready pointed out that it's on the local CB to save them, not the ECB.

Furthermore, the share price has nothing to do with the bank's sittuation (but I have to agree that in our case it does).

As I see it, the ECB purpose is to stop inflation, no to stop the equity market from falling as on the other side of the ponds happens

2008 Jun 28 09:57 AM