ECB's concern about asset price inflation might hit the US dollar

Sunday, April 17, 2005

The ECB cannot be counted on to hold its key interest rate stable for much longer. In its latest monthly bulletin the watchdog for the the stability of the Euro said that rising asset prices could lead it to raise interest rates even if growth in the 12-nation euro zone remained sluggish this year and inflation stayed under control.
"The central bank would adopt a somewhat tighter policy stance in the face of an inflating asset market than it would otherwise allow if confronted with a similar macroeconomic outlook under more normal market conditions," it said in regard to rapidly rising real estate prices in the Euro region which are attributed to the low interest rate climate the Euro area enjoys.
In its editorial it also pointed out that inflation is to remain above 2 percent for the remainder of 2005, "although the exact figure will depend largely on how oil prices develop."
These statements have not yet sent shivers across the Atlantic where a rate rise in Europe is broadly seen as another strong argument for a weakening dollar. Higher interest rates would inevitably lead to a reversal of the huge currency inflows the US fixed income market has enjoyed because of the interest rate differential the dollar curently enjoys to its main rivals, the Euro and the Yen.
Central banks worldwide are looking for ways to get out of the dilemma the weak dollar and the so far inflation-immune gold assets represent. In a survey 65 central banks worldwide had opted for the possibility to shift a greater part of their foreign exchange reserves away from the dollar into the Euro, the Financial Times had reported on January 24.
The decision of the German Bundesbank to abstain from more gold sales - the same policy is also observed in France - is officially founded on the fact that a sale of the country's savings to mend holes in Germanys budget deficit would not be favored by the German public. But it also seems to come from the expectation that the gold price will rather rise than decline although Bundesbank officials go out of the way to avoid any commentary on the likely future of gold prices, except for saying that gold is a stabilizing factor.
Germany hoards 3,433 tonnes of gold, more than the IMF (3,217 tonnes). France states its gold reserves at 2,978 tonnes. In comparison, US gold reserves are believed to be 8,136 tonnes. The biggest private gold hoarders are to be found in India: gold imports rose threefold to 600 tonnes annually in the last four years.
The yellow metal has retreated to 422 $ an ounce, after a 16-year-high of 455 $ last year and its price moves are almost perfectly negatively correlated to the dollar exchange rate. Gold analysts see it trading in a range between 400 and 500 $ this year. Purchases by Asian central banks outstrip the sales of European central banks recently, market observers say.


Wikinvest Wire