Curious, this was from forexnews.com. What are your thoughts?
"It is becoming increasingly accepted that the European Central Bank will have to act in the event that the euro nears the $1.35 level, which is the equivalent to the 1.45 low in the USD/Deutsche mark attained in summer 1995. In addition to US officialsâ laisser-faire attitude towards the dollar decline, European monetary officials have also contributed to the dollarâs decline by reiterating that the pace of euro appreciation was more material than absolute levels. EU Monetary Commissioner Al Munia said the Eurozone could remain competitive with the euro at current levels as long as there were no sharp movements. But with Eurozone growth projections being downgraded to as low as 1.7% in 2005 from 2.0% in 2004, an accumulated strengthening in the currency will run counter to the strengthening of the overall economy.
Given the technical importance of the 1.35 level as well as the growth implications of such a level, we expect a more aggressive type of interventionism from the ECB, which will eventually take the form of covert euro selling via German and French commercial banks.
Thursday's upcoming release of IFO business sentiment survey from Germany could show a decline to as low as 94.5 in November from Octoberâs 95.3. This would be the lowest level since September 2003. We already saw from Germanyâs ZEW research instituteâs economic sentiment index tumbling by 17.4 points to 13.9 in November. The index is now well below its historical average of 34.6 points. The ZEW Institute said âthe experts expect economic growth to slow down in the period up to May of next year [due to] an expected worldwide economic slowdown and the very distinct appreciation of the Euro which has taken place recently and which could prove a burden for German external tradeâ. The ZEWâs economic expectations index for the Eurozone also declined, shedding 15.5 points to a reading of 22.1.
The situation in France, the Eurozone second largest economy, isnât faring well either especially as GDP growth slowed to a sluggish 0.1% rate in Q3 from 0.7% in Q2. With French Finance minister Nicolas Sarkozy leaving his post after 8 months to head the ruling Popular Movement Party, one expect the economy to become an increasingly political issue, especially as Sarkozy makes his bid for president in 2007.
Despite the European Central Bankâs independence from government pressure, we believe the central bank will begin echoing more resounding signs of concern that should exert pressure on the currency around the 1.35 level. Thinning trading conditions ahead of the Winter Holidays could accelerate currency volatility, with the most likely direction to be dollar negative. But in the short-term, we especially expect the ECB to strengthen its rhetoric in the event that Fridayâs November labor report disappoints below 100K."
