Tuesday, December 4, 2007

Dollar woe to get worse?

Jim Jubak said a probably interest rate hike by the European Central Bank while U.S. financiers pressure the Fed for another rate cut will be the perfect storm for the dollar’s continued slump.

What has changed so much in just three weeks? Inflation in Europe has picked up and is now above the range the European Central Bank has said it will tolerate. There's a good chance the bank will raise short-term interest rates to 4.25% from 4% when it meets Thursday.

With U.S. interest rates on hold or headed lower, the result would be another big boost to the euro, another hit to the dollar, a continued move away from the U.S. dollar by central banks in Asia, Russia and the Middle East, and higher prices for gold and, more importantly, oil.

Jubak focuses on Germany, the largest EU economy. Inflation there is at a 13-year high. Meanwhile, unemployment is at a 15-year low. (That’s a further sign that U.S. conservative and neoliberal/DLC bashing of “European economic “woes” is full of crap.)

Because of such low unemployment, the ECB has no pressure against hiking interest rates.

Plus, unlike the Fed, the ECB is actually eyeing inflation as well as the credit crunch.

Result, if the ECB does as expected? The dollar will fall more, gold will climb, and more foreign countries (read: China and OPEC members) will be more tempted to dump dollars for euros.