“Brutal moves are never welcome”

Interesting term of art, such as it is (having been employed thus, previously):

The European Central Bank threw its weight Thursday behind attempts to rein in the euro, reflecting concern that the currency’s rapid ascent against the dollar was making life harder for European businesses.

The bank president, Jean-Claude Trichet, made his verbal intervention after announcing that interest rates were being held steady amid continued turbulence in financial markets.

…the effectiveness of Trichet’s verbal intervention remains to be seen. The euro strengthened slightly Thursday, hovering near the record high slightly above $1.47 that it had reached in frenzied trading Wednesday. Downbeat comments by Ben Bernanke, chairman of U.S. Federal Reserve, about the state of the U.S. economy also weighed on the dollar.

Analysts pointed out that the ECB’s effort in 2004 to talk down the euro eventually bore fruit, although the unwinding of speculative bets against the dollar also played a role.

The verbal-interventionist approach to Euro-bolstering (verbal interventions not restricted to central bankers and ForEx markets) has been studied, previously. In their study, published in the European Journal of Political Economy, Jansen and de Haan (2007) found little support for the idea.

Based on a direction, a smoothing and a volatility criterion, we find little evidence that ECB verbal interventions were effective. The most important determinant of effectiveness is whether or not the verbal intervention is captured in the news report headline. Verbal interventions that coincide with releases of macroeconomic data are followed by lower exchange rate volatility.

The trouble with verbal interventions is that the market absorbs them, and their effectiveness subsequently declines, over time.

Facing a liquidity problem, more than a generic macroeconomic problem (Bernanke must be jealous), the ECB has rather more tools at its disposal, i.e.

Although it is keeping an eye on rapidly rising oil and food prices, the ECB has apparently concluded that raising borrowing costs at a time when many major banks are still reeling from losses incurred through bets on mortgage-backed securities would be too dangerous. Still, Trichet is not hiding the bank’s preference to tighten when markets calm down, and he repeated a promise to act “in a firm and timely manner.”

The ECB also announced Thursday that it would conduct two new liquidity injections worth €115 billion, or $168 billion, into the euro money markets, an apparent indication that it still saw credit tighter than normal and that it was determined to nurse the markets back to normality.

They have an advantage in the inflation-squashing game, relative to the US: their appreciating currency helps to keep down the effects of appreciating food and energy prices. The US is having both go gang-busters at it. Even BusinessWeek’s attempt at making lemonade barely rates as optimism of almost any kind (actually it comes across as more of a need to write something, fulfilled – but they should have just run a paid advertisement or something).

It strikes me as a decent attempt at slowing the appreciation of the Euro, or at least keeping speculators thinking twice before pushing the price up further with their nonsense (possible throwing the dollar a line, in the process). It’s certainly in their interests – given that inflation is their job first, before employment – to let the current trend hold, until a better long-term picture of food and energy prices emerges.


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