We have long said that the direction of monetary policy is far more important than the level of interest rates and today, the move in the EUR/USD is a testament to that. The currency pair climbed to a new record high of 1.3835 following less hawkish comments from the US central bank. In an environment where the European Central Bank is pounding the table about the need to raise rates, the growing chance of a rate cut before a rate hike in the US is driving the dollar lower.
One would expect that the ECB would begin backing off given the recent appreciation in their currency, but instead of showing any signs of concern, Trichet warned today about that any attempts to influence the ECB would be in violation of the EU treaty. This suggests that they are not willing to talk down the Euro and will only do so under their own terms. ECB council member Garganas also said yesterday that he expects the central bank to raise rates further.