ECB President threw a wrench into the EUR/USD rally when he joined the chorus of central bankers supporting a strong dollar. Unlike the U.S. who really needs a weaker dollar, the Eurozone will really benefit from a stronger one. So far, ECB President Trichet has been comfortable with the strong euro because it has not affected trade materially and instead helps to reduce inflationary pressures. This morning's trade numbers from the Eurozone indicated that the deficit turned into a surplus thanks to the strongest rise in exports in 20 months. If the strong currency was really having a detrimental effect on the export sector, we would not have seen a 5.5 percent increase in foreign demand. Imports also rose by 1.1 percent which suggests that domestic demand is steady as well.
Although Trichet has a vested interest in seeing the dollar rise, he is not immediately concerned about the decline. This morning, the ECB head said he "notes with interest" Bernanke's comments on the dollar and believe its a "very important statement" because "a strong dollar is in the world's interest." According to Trichet, the "euro was not created to become a reserve currency" and to replace the dollar. On monetary policy, interest rates are still appropriate, but Trichet said unconventional steps will be phased out "progressively." The central bank is gearing up for an exit and the closer they get, the more demand there will be for euros instead of dollars.
Yesterday, we said traders should consider Bernanke's comments as verbal intervention in the dollar and the fact that Trichet says those comments were "very important" as well confirms that central bank officials want to talk up the dollar. However talk will only get the Fed so far - verbal intervention with no major threat of physical intervention or rate hikes carries little weight.
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