[walden]

Thanks for your reply-- I'm still thinking it over, but it helps.

Do you think that if the EU central bank lowered interest rates it would stabilize the relative values, or even reverse the trend? How much would be required, and why don't they do it?

[SAJ]

One cut certainly won't stabilise anything. In fact, it would likely make fx rates even more volatile in the short term. What appears to me to be necessary is a policy shift on the part of ECB, establishing a bias toward lower rates generally. That's the good news.

The bad news is that this is probably impossible for 6 months, maybe a year. Dim Wim is the lamest of lame ducks; he can't credibly push for a policy shift now. His successor, probably the ultra-crooked Trichet (but it will be some froggie jerk in any case) has spent most or all his political capital fighting to avoid a long, long stay on the Ile de France, and so is in no position to exercise leadership on this matter. Not that he likely would; the froggies don't think about interest rates in the way normal people do...and, anyway, they're too busy planning their vacations (it's almost June, after all).

Add to this mix the assorted budgetary and deficit maintenance requirements of Maastricht, and you've a very nice formula for doing nothing. Fine with me -- Wonderland economies will pay a HUGE price for standing pat, I'll make a few bob (or more than a few) trading on their stupidity in the meantime, and the sun will shine very pleasantly. :^)

This sort of thing, btw, is why I much prefer longer-term trading strategies over short-term swing trading. Once the trader has the **actual** orientation of the CBs in hand (as opposed to the 'jawbone' orientation), he need do relatively little work to keep a profitable position profitable for some considerable period, occasionally for the best part of a year. EUR/USD may stabilise shortly, or it may not, but what it won't do any time soon is reverse sharply in USD's favour.

FReegards!