Trichet is “full of it” with his inflation fighting talk.

I’m sorry but I just don’t believe Trichet’s recent load of crap. He keeps talking about fighting inflation. Well, go ahead and raise rates or shut up then, Trichet. He’s all bark and no bite. He’s had plenty of chances to “fight inflation” before yet he held rates steady.

 If he hikes rates, he’ll have more money flood into the Euro and push rates even higher. Historically, the economy caves when exchange rates get this high. In fact, since the creation of the Euro, the exchange rate has never been this high.

 But if you use the Deutsche mark as a proxy for the “pre-euro” years, as many traders do, then you’ll find that the exchange rates have gone this high over the past 25 years but not for long and when they fall….look out below. Check out the chart below that goes back about 25 years so you can visualize what I mean. (Click on the image below to enlarge it.)

 The past shows that the 1.50 to 1.52 level is hard to hold.

Why the Deutsche mark? Because the euro responds the most to German economics. It’s their largest and most productive economy. So traders watch German data much more than Italian, French data, etc.

 So the high exchange rate will slow their economy down as it continues crushing their export sector. I see the euro easily going back to the 1.30 to 1.35 levels this year. That would be an enormous drop of 1,000 to 1,500 pips!

 So Trichet’s got his head in the sand. The Dow Jones STOXX 50 dropped about 100 points (over 3%) overnight. Their economy will eventually suffer if Trichet doesn’t get that exchange rate down.

 He will eventually have to wake up to reality and cut rates along with most of the industrialized world. So will someone set an alarm clock so he will wake up?

Sean Hyman

Editor/Trader, www.money-trader.com