A Forex View From Afar

2.0 on Euro or 2.5 on Pound?

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Mr. Trichet used at least a dozen times the word "strong", mostly referring to inflation, while the words "weak" or "less" were used only once, referring to global demand. This shows that inflation tensions are building up in the Euro Area, being, for now, a bigger threat then the credit crisis. Higher inflation expectations will usually lead to a stronger currency, which we can see now in every Euro chart

Mr. Trichet made 8 references to wage-inflation and its second round effects. Slowly, inflation, lead by higher wage expectations has become a bigger problem than the financial turmoil.

Speaking about wages, there is a saying: "do what the priest says, not what he does". Mr. Trichet is the exception, by raising his salary by only 2% in 2007, under the inflation benchmark, to $530,617. Compare this to Mr. Bernanke salary of $191,300 (which soon will ask to be paid in a basket of foreign currencies, or maybe he already is) or to Mr. Mervyn King $569,378.

Seems pretty strange, that most analysts see the strong euro buffering Euro Area growth, but still, the Central Bank President still makes remarks about inflation. One of the most efficient ways to chill the currency strengthening trend is verbal intervention. Seems Mr. Trichet doesn't want to use it, or maybe he isn't too worried about the euro valuations.

PS. I heard a rumor that Mr. Trichet and Mr. Mervyn King made a bet: what will be reached first 2.0 on eur/usd or 2.5 on gbp/usd?

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