As we emphasized in our recent post on Nasdaq, the strength of the dollar is the actual story of the day.
The financial media will focus on how terrorism and weakness in the European markets have accelerated the European Central Bank’s (ECB) easing policies, drumming up the significance of the 10 basis point drop. In reality, the effects of this rate cut are more psychological than economic. With the Fed on the cusp of liftoff, the ECB is sending the message that they are, at least in the near term, willing to have divergent monetary policy. In the meantime, everything is falling into place for a surge in the dollar.
Interestingly, according to our sentiment data on the ECB, the bank’s mood is actually, ever so slightly, trending up. This indicates that the rate cut is not necessarily tied to ECB’s long term outlook.
Bottom line: Europe may be grabbing headlines, but the real news is all about the growing strength of the US dollar.
(Mario Draghi, President of the European Central Bank; photo by January)