The euro rose against the dollar and the yen in Europe after European Central Bank President Jean- Claude Trichet said the region's economy may be strengthening.
"There are recent signs of an increase in dynamism in investments and in internal demand,'' he said in an interview with Italian newspaper Il Sole/24 Ore. "We will understand the situation better with the first quarter 2005 data."...
"Trichet's comments come with authority after a spate of positive surprises suggested the economy may not be as weak as thought,'' said Shogo Nagaya, a currency trader in Tokyo at Nomura Trust & Banking Co., part of Japan's biggest brokerage. ``That's going to improve sentiment on the economy and the euro.'' It may climb to $1.34 this week, he said.
Investor confidence in Germany, Europe's largest economy, unexpectedly increased to a six-month high in March, the ZEW Center for European Economic Research said yesterday.
[Trichet] has warned that "bad" reform of the European Union's budget rules would change significantly the environment in which the bank took monetary policy decisions.
In a clear sign of the central bank's alarm at a possible watering down of the stability and growth pact, Mr Trichet also told the European parliament yesterday that a period of weak economic growth was precisely the wrong time to loosen the rules...
His comments suggested that the ECB would react by increasing interest rates if it deemed it necessary.
Not everyone is convinced, though. From Reuters:
... several communication mishaps over the past year have left market economists a little cautious over how much weight to put on mounting ECB warnings a rate hike is coming.
This leaves the ECB in an uncomfortable situation. Markets are scarcely responding to rate warnings, and analysts are starting to question how effective Trichet will be in preparing markets for the first rate change since he took charge.
"It will be a hard test," said Thomas Mayer, European economist for Deutsche Bank.
"When you have cried wolf too often, once the data starts turning up, you have to be very, very clear," said Christel Aranda-Hassel, euro zone economist at Credit Suisse First Boston...
The ECB has stuck the wording of "continued vigilance" on inflationary risks since December, and yet in interviews, speeches and news conferences, ECB policymakers are sending ever clearer signals they would like to tighten monetary policy -- even though they have cut their growth forecasts again and the outlook is distinctly uncertain.
"The problem we are having is that it is odd to deliver that message, given the way the economy has performed over the last six months," said Walton.
It carries a risk too. "If you talk tough and then don't deliver, people don't know quite what to listen to."
This quite interesting article holds out Fedspeak in the last several years as a model of clear communication. Imagine that.
(P.S. Don't read that last comment as a signal that I disagree.)
President Trichet's comments come hot on the heels of his reminder that he does not favorably view efforts to water down deficit containment in the euro area. From yesterday's Financial Times: