Trichet's Exit Faces bar as Fed Clouds Outlook

Federal Reserve Chairman Ben S Bernanke is making it harder for Jean-Claude Trichet to lead the European Central Bank out of crisis mode.

Last night’s decision by the Fed to buy an additional $600 billion of Treasuries through June to bolster the US economy may force the ECB to delay the withdrawal of its own stimulus measures, economists said. The Fed’s second round of so-called quantitative easing risks driving the euro higher, threatening Europe’s export-led recovery.

“It’s complicating the ECB’s exit and council members really need to think hard about their strategy,” said Julian Callow, chief European economist at Barclays Capital in London. “They may have to reconsider their plans.”

The Frankfurt-based central bank has said it intends to continue withdrawing its emergency measures, with some policy makers voicing concern about the risks of leaving them in place too long. At the same time, economic divergences within the 16- nation euro region are growing as Germany outpaces debt-strapped nations such as Portugal, Ireland and Greece.

The Fed’s move, which pushed the euro to a nine-month high against the dollar, may have added another headwind. “The Fed is diluting its currency,” said Juergen Michels, chief euro-area economist at Citigroup Inc in London. “The ECB won’t be too delighted about a rising euro.”

33-hour marathon
The single currency climbed as high as $1.4179 immediately after yesterday’s Fed announcement, which kick-started a 33-hour central banking marathon. The euro has risen about 18 per cent against the dollar since early June and Citigroup predicts it will appreciate to $1.44 by the end of the year. It traded at $1.4132 at 8:44 am in Frankfurt. The ECB will leave its benchmark interest rate at a record low of 1 per cent today, according to a Bloomberg News survey.