I became a little less negative on the stock market following the ECB statement Thursday morning. Everyone has been hoping for a dollar rebound to help stabilize the economy and stock market. So far, no luck. The Fed was ‘talking up’ the dollar because they could not raise rates and this tactic worked until two weeks ago when Trichet (ECB President) announced he would raise rates in the Eurozone. Foreign rates going higher make the dollar less attractive to investors.
As expected, Trichet and the ECB raised rates a quarter point to 4.25% Thursday morning, but it was the rhetoric that was positive for the dollar. Trichet commented that he has “no bias” for further rate hikes and he expects inflation to stabilize because of this one rate increase. The dollar index rallied 1% Thursday because of Trichet’s bullish commentary.
I was very worried about what Trichet might say. His goal is to combat inflation, but I was concerned that his rate hike would be counter-productive. The rate hike, and possible further rate hikes, would make the dollar relatively weaker, and seeing that commodities are denominated in dollars, he would be fueling inflation. However, my concerns were eased when he mentioned that no more rate hikes are on the horizon.
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