Weekly Economic & Financial Commentary

As expected, the European Central Bank (ECB) raised their overnight lending rate by a quarter percentage point this morning. The reaction in the foreign exchange market was a bit of a surprise, with the dollar strengthening. This should curb some of the calls for the Federal Reserve to follow the ECB higher. Gain a wider view of the factors behind current economic news with comprehensive analysis and commentary from Wachovia Economic Commentary and Currency Risk Management Groups

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Independent Thinking For The 4th
As expected, the European Central Bank (ECB) raised their overnight lending rate by a quarter percentage point this morning. The reaction in the foreign exchange market was a bit of a surprise, with the dollar strengthening. This should curb some of the calls for the Federal Reserve to follow the ECB higher.

 

The thinking has been that higher rates in Europe would weaken the dollar and drive oil and other key commodity prices higher. Such thinking has several flaws, the largest of which is the absence of anyone asking why the ECB is raising interest rates at all.

 

The statement that accompanied the ECB’s decision helped temper fears of a dollar collapse. ECB president Jean-Claude Trichet said he has no bias on future interest rate policy and he expects economic growth to slow in coming months. So even if the ECB’s actions differ from the Fed, their view on future economic conditions are about the same.

 

We never thought the Fed would follow the ECB higher. The Federal Reserve is pretty diligent about guarding their independence and we doubt they would back off that on the eve of the Fourth of July.

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