All eyes were on European Central Bank President Jean-Claude Trichet last September 28 as he talked about the state of the euro zone economy before the European Parliament’s Committee on Economic and Monetary Affairs. In his statement, he put emphasis on two important matters: 1) the ECB’s exit strategy and, 2) the importance of a strong USD
On the first issue, Trichet said that it is still premature for the ECB to pull the plug on its stimulus measures. Recall that the ECB has already brought its interest rate to a record low of 1% and has also employed several easing policies to inject more liquidity in their financial market. Despite all these efforts, the euro zone economy is still in a slump as commercial banks remain reluctant to give out credit. The banks’ stubbornness to lend is reflected in the meek 0.1% annualized growth in private sector loans this August. Although Trichet mentioned that the central bank will have to eventually lift its hand from the market, he said, “Sorry folks, it ain’t time for that yet.”
Regarding the USD, Trichet mentioned that a strong dollar is “extremely important” for the recovery of the global economy, especially the export-based euro zone. Market participants have been favoring the euro and the other “anti-dollars” given the broad-based improvement in the global markets.
Still… Trichet warned that the recovery in these economies, particularly in those that rely heavily on exports, may be capped because of the weakening dollar. How so? Note that whenever a country wishes to buy goods and services from a foreign nation, it must first purchase that nation’s domestic currency. This means that, whenever the euro gains versus the dollar, it becomes more expensive for Americans to import goods from the Euro zone.
The most recent euro zone trade balance reveals that its trade surplus grew to 6.8 billion euros, up from June’s positively revised figure of 2.3 billion. Furthermore, the surplus was also much higher than the 1.2 billion euro forecast. Time to pop the champagne, eh?