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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (4396)	1/5/2004 11:04:47 AM
From: TobagoJack	Read Replies (1) \| Respond to of 110194

<<Lessons of 2003>> ... Message 19654194

To: ild who wrote (4396)	1/5/2004 12:06:34 PM
From: Haim R. Branisteanu	Respond to of 110194

The best way out of this dilemma, in our view, would be to make use of an instrument that the ECB has used once before in a similar situation (though with the euro moving in the opposite direction): foreign exchange intervention. Well-timed and surprising dollar purchases (ideally, but not necessarily, in concert with other major central banks) would re-insert two-way risk into what has increasingly become a one-way euro/dollar bet and could cap or even reverse euro strength. In our view, the chances that the ECB will intervene in FX markets are high and rising, especially if the euro continues to overshoot in the coming weeks and months. The Case for Higher Interest Rates Revisited With most market participants focussing almost exclusively on the euro rally and its implications for ECB policy, it is worth restating the basic arguments in favour of higher interest rates. Put simply, the ECB’s zero interest-rate policy, which was appropriate in the zero real GDP growth environment of 2003, is no longer appropriate if growth returns to or above trend, which remains the most likely outcome for 2004. If real interest rates remain below real GDP growth for too long, this will churn excess liquidity and credit growth, which in turn encourages excessive risk taking in financial markets and pumps up asset price bubbles. Much of this is already under way: Money supply has grown persistently above the ECB’s reference value and the most recent (November) bank lending data showed a marked pickup in the growth rate of credit to the private sector. Against this backdrop, it hardly comes as a surprise that the most risky of all local European equity markets, the DAX, was the star performer during 2003 — up 37% — and that credit spreads trade at historically low levels.