by Nicholas Hastings
Wall Street Journal
April 6, 2011
We are about to watch the European Central Bank cure the disease but possibly kill the patient.
As the central bank launches its first rate-raising cycle since the start of the global financial crisis three years ago, it is giving the euro a sharp lift for now.
However, the side-effects of higher interest rates will eventually take their toll. And, if the ECB raises rates too far, too fast, they could yet spell the end of the single currency.
At the moment, the euro is rising for two reasons.
As recent global tensions subside and investor appetite for risk returns, the prospects of higher interests in the euro zone is making the euro attractive. The ECB will be the first of the West’s major central banks to start tightening policy, leaving the U.S. Federal Reserve, the Bank of Japan and the Bank of England all trailing far behind.
It is still unclear just how much tightening the ECB has in mind, but yield differentials have widened enough against other major currencies to ensure that, apart from the Australian dollar, the single currency is at the top of the carry-trade tree.
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