Predict the direction of the Dollar thread

[DcifrThs]

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i, however, don't think the ECB will be lowering rates anytime in the immediate future with germany powering away as it has (and its CPI still ticking up).

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Can u expand on teh germany part? I'm not sure I follow. Most of my normal course of reading and work doesn't lead me to German info.

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sure.

germany is the powerhouse of the EU right now (and has the main contribution to the euro area CA trade/merchandise surplus). it is the largest euro area economy and the home of the ECB (either located in or near the bundesbank).

it recently posted a 253.1billion (US$ terms) trade surplus vs. euro area's 42.1billion. germany is a massive export led economy but is typically viewed as having ancient labor market views (not liberal labor market).

the german S&P500 (the DAX) is up 18% in local currency terms and 28% in US$ terms since december 29th, matched only by greece in the euro area.

further, german inflation is on the rise while its growth has been merely OK at 1.75% in the past 2 quarters (2.5% in latest and 1.0% in the first) but it has been at the steady growth rate of between 2-3% for a few years now.

consumer prices rose 1% a year ago, forcast for 2007 is about 2% and the latest #s though (in september) were 2.5% rise in consumer prices.

the yield curve doestn' exactly reflect huge inflationary expectations though as short yields are 4.63% while long rates are 4.13% (i.e. the steepest inversion in the EU signifying that inflationary pressures are priced to be settled more in germany than in other EU countries...OR that demand for safe haven german bonds is far larger than in other euro area countries).

so while the euro area is slowly slightly (but still expanding), germany is on pace for a steady similar growth rate.

there are downside risks though in germany since the bundesbank had to bail out 2 landesbanks (state owned banks) that were in the very fun business of borrowing short (through commercial paper markets) and lending long (i.e. investing in US subprime backed AAA rated paper).

also, german unemployment is about 8.8% (in their national definiton, whatever that is) and their labor market is not very fluid...so inflation poses a big risk...this is the case since it is way easier to not hire workers in germany than it is to fire them (similar to france). so unemployment remains higher than it would be with a US style labor market regulator in charge.

overall though, germany is a big driver of euro area growth and with high inflation and a large % of the total euro area GDP coming from it (and the trade balance), lower rates to spur growth may produce too much inflationary risks to be attractive.

in the UK on the other hand, lower rates are far more likely.

these are just my thoughts and if anybody has more to add, please do.

Barron