Cuba
Anyone for cocktails?
Outsiders bet that bigger changes are on their way
THE diplomatic sanctions imposed by the European Union after Cuba jailed 75 dissidents in 2003 were hardly painful. They mainly consisted of restricting political contacts and inviting dissidents to embassy functions, prompting a boycott by Cuban officials that became known as the “cocktail war”. The sanctions were suspended in 2005. Nevertheless, the EU’s decision on June 19th to lift them was symbolically important. It was another small indication that as Cuba edges towards life after Fidel Castro, relations between the communist island and the outside world are evolving too.
The EU’s decision was a surprise. The socialist government in Spain—the largest European investor in Cuba—has long wanted closer ties. Last year its foreign minister began regular talks with his Cuban counterpart. But the former Communist countries of eastern Europe, together with Sweden, were reluctant to drop the sanctions while most of the dissidents arrested in 2003 remain in jail.
They were won over by the notion that things are starting to change in Cuba, especially since Fidel Castro formally handed over the presidency to his brother, Raúl, in February. Mainly this has involved small economic steps, such as dropping bans on Cubans owning various consumer durables and turning more state land over to private farming. In lifting the sanctions, the EU reiterated its calls for Cuba to release all political prisoners, implement the international human-rights covenants that it recently signed, and make “real progress towards a pluralist democracy”.
Cuba’s reaction to the EU’s move was itself telling. In an article on a Cuban website, Fidel Castro fulminated against “enormous hypocrisy” (because the EU also agreed a streamlined procedure to expel illegal migrants, who include many Latin Americans). Europe, he said, wanted “impunity for those who would hand [Cuba] over to imperialism”. But in an apparent sign that it is no longer taboo to disagree with the comandante, Cuba’s foreign minister, Felipe Pérez Roque, described the move as “a step in the right direction”.
The United States is unlikely to follow Europe’s lead. According to Caleb McCarry, whom George Bush appointed as his “Cuba transition co-ordinator”, Raúl Castro’s government would need to free all political prisoners, allow civil and political freedom and open “a pathway to free and fair elections” before America would relax its 46-year trade embargo. Such changes are unlikely as long as Fidel lives, and are not inevitable thereafter.
Any change in American policy therefore depends on the outcome of the presidential election. Barack Obama has said that he would reverse restrictions on remittances and family visits to Cuba imposed by Mr Bush. That might be a prelude to bigger policy changes. John McCain would maintain the existing policy.
As for Latin America, it has no appetite for isolating Cuba, says José Miguel Insulza, the secretary-general of the Organisation of American States. Since illness forced Fidel to turn over his powers two years ago, several Latin American countries have sought closer relations with Cuba. In January Brazil’s president, Luiz Inácio Lula da Silva, visited the island with a string of businessmen in tow, signing trade and investment deals worth $1 billion.
Mexico’s president, Felipe Calderón, has reversed his predecessor’s policy of speaking out against the lack of human rights in Cuba, and has restored his country’s traditionally close ties. Earlier this year Patricia Espinosa, Mexico’s foreign minister, renegotiated $400m of debt on which Cuba had defaulted. Cultural exchanges have increased, and Mr Calderón is expected to visit Havana soon.
This closer embrace of Cuba mixes self-interest with calculation. In Mexico, as in the United States and Spain, Cuba is a domestic political issue. Some commentators argue that in repairing relations, Mr Calderón hopes to appease the left-wing opposition, which disputed his election victory in 2006. Instability in Cuba, just 135 miles (220km) away across the Yucatán Channel, could pose a security threat to Mexico, argues Luis Rubio, a political analyst.
Both Brazil and Mexico see business opportunities on the island, especially since Fidel’s successors are likely to be more open to foreign investment. And though they won’t say so publicly, diplomats from these countries see closer ties as a way of balancing the influence of Hugo Chávez, Venezuela’s president, who has replaced the Soviet Union as Cuba’s main provider of aid. Unlike Mr Chávez, they will quietly support political liberalisation in Cuba, they say. They believe that Raúl Castro worries about Cuba’s dependence on Venezuela and China. Some officials in Washington accept this argument, and say they are happy to see Latin American democracies seeking influence where the United States cannot.
However, not everyone in Latin America or Europe takes that view. Supporters of the jailed dissidents were critical of the EU’s move. Over the past two decades, Latin American governments, egged on by outsiders, have signed international agreements that oblige them to support democracy and human rights in the region. In disregarding these when it comes to Cuba, both they and the EU are being irresponsible, says Jorge Castañeda, a former Mexican foreign minister.
What is certainly true is that those who argue for constructive engagement as a way to bring change in Cuba have little to show for it so far. But the American trade embargo has failed even more manifestly, as well as inflicting harm on ordinary Cubans. So far, change in Cuba has come in tiny, glacial movements. Many outsiders are betting that over the next year or two the pace will increase.
Colombia
Colombia's hostage triumph
The government scores a big success against the FARC, freeing Ingrid Betancourt and other hostages
IT WAS an ending happier than any Hollywood director would dare to dream up. After years of captivity at the hands of left-wing FARC guerrillas, Ingrid Betancourt, three American defence contractors and 11 Colombian soldiers were rescued on Wednesday July 2nd by the army, without a shot being fired. It was a “miracle”, said Ms Betancourt, a former presidential candidate who holds French and Colombian nationality and who had been detained for more than six years, for much of that time in chains and in poor health. It was a triumph for Colombia’s president, Álvaro Uribe, who at some political cost had resisted pressure to negotiate for the release of Ms Betancourt. And it was a disaster for the FARC and its sympathisers in Latin America who hoped to use the hostage issue to weaken Mr Uribe.
The rescue operation involved years of planning. But it was also testament to the army’s new sophistication in intelligence and infiltration. The army built on its recent successes in disrupting the FARC’s communications and isolating its leaders. An attempt to rescue other guerrilla hostages in 2003 had ended in disaster, when a dozen were killed by their captors.
This time the army relied on trickery. A former hostage who escaped last year supplied details of the jungle camps in the remote south-eastern departments of Guaviare and Vaupés. Army intelligence agents, posing as senior FARC members, made contact with the guerrilla commander guarding the hostages. They gave him a false order purporting to be from the FARC’s new leader, Alfonso Cano, that the hostages were to be taken to two helicopters sent by a humanitarian organisation—mimicking the arrangements when five other captives were released earlier this year after mediation by Venezuela’s president, Hugo Chávez.
Once on board the helicopters, the two guerrilla escorts were overpowered and the army agents, dressed in Che Guevara T-shirts, broke the news to the hostages that they were flying to an army base and freedom. “We couldn’t believe it. The helicopter nearly fell because we jumped for joy,” said Ms Betancourt.
The operation is the latest of several devastating blows suffered this year by the FARC, which mixes an antiquated Marxism-Leninism with drug-trafficking and racketeering. In March, the army bombed a guerrilla camp just over the border in Ecuador, killing Raúl Reyes, a member of the group’s seven-man secretariat. The incident yielded a huge haul of documents from Mr Reyes’s computers. Days later another member of the secretariat was killed by his own bodyguard. Then Manuel Marulanda, the FARC’s founder and undisputed leader, died, supposedly of a heart attack.
The FARC still hold several hundred hostages, but they have lost their chief prizes. Ms Betancourt was a minor politician in Colombia when she was seized while campaigning for the presidency in 2002. But she has become a national cause célèbre in France, where she studied; she married a Frenchman and her two children live there. The three Americans, who were working on contract to the United States government, were captured when their anti-drug surveillance plane crashed in guerrilla territory in 2003.
The FARC claimed to want to swap their trophy hostages for jailed guerrillas. But e-mails from Mr Reyes’s computer, seen by The Economist, show that their real aim was to use them to embarrass Mr Uribe and to gain international recognition. They wanted the president to “demilitarise” a swathe of territory to allow talks. Mr Uribe was resolutely against that: during past peace talks the FARC used a similar enclave for recruiting and training while continuing to kill and kidnap.
The hostage release came in a week in which Mr Uribe was widely criticised at home for appearing to blow up a conflict with Colombia’s judiciary in order to engineer the possibility of a third term. For months he has refused to rule out seeking another constitutional change that would allow him to stand again. His supporters have collected enough signatures for a referendum on this issue. The triumphant release of the hostages, coming on top of his other successes, means that if he indeed wants a third term, Mr Uribe may well be able to get it. But others have political ambitions too. One is Juan Manuel Santos, who as defence minister oversaw those successes. Another is Ms Betancourt, who in freedom was quick to say she still aspires to the presidency. It would be even stranger than the movies if the three protagonists in this week’s happy ending were to meet again in a sequel at the ballot box in two years’ time.
The euro-area economy
A warning shot
The ECB raises interest rates to show it means business about inflation
EVEN the expected can sometimes be disquieting. Few were surprised on Thursday July 3rd when the European Central Bank raised its benchmark interest rate by a quarter of a percentage point, to 4.25%. Jean-Claude Trichet, the ECB chief, had suggested at the bank’s previous rate-setting meeting, in June, that an increase was likely. A similar message has since been passed on in speeches by members of the bank’s rate-setting council. Nor did renewed turmoil in global financial markets stop the bank from acting. Mr Trichet told the post-meeting press conference that the decision by the 21-strong council had been unanimous.
But the shift in policy is the most controversial in the ECB’s ten-year history. Until now, the bank’s calls have been straightforward. It raised interest rates when the economy was gathering steam and price pressures were building; it cut them when demand threatened to stall. This decision is different. It comes at a time when the economy and inflation are moving in opposite directions. The closely watched survey of purchasing managers, released earlier in the day, showed that activity had slumped to its lowest level for five years in June. In the same month, consumer-price inflation picked up to 4%, the highest rate since the euro’s launch and well above the ECB’s target ceiling of 2%.
Since the ECB has a strict remit to maintain price stability, its dread of high inflation is greater than its fear of recession: hence the rate rise. But many will argue that tightening policy at such a time is a serious misstep. High inflation mostly reflects the steep climb in commodity prices, particularly oil and food. The cost of these on world markets is largely unaffected by ECB policy, indeed oil prices pushed up towards $146 a barrel as the rate decision was announced. Inflation should start to fall back again once commodity prices peak. A weaker economy would drag down inflation too.
The ECB’s action has a subtler aim, however. It knows that the inflation rate is partly determined by what people expect it to be. It is alarmed that measures of inflation expectations derived from surveys and financial markets have started to pick up. If these were to influence the way wages and prices are set, today’s commodity-led inflation may persist long after oil and food prices stabilise. Mr Trichet repeatedly stressed after the decision that it was essential that people had confidence that the ECB would deliver low inflation over the medium term.
In principle, inflation expectations depend on public trust in the monetary policymakers to slow the rate of price increases. If everyone believes that inflation will fall back towards the central bank’s target, then workers will temper their wage claims and businesses will think twice about lifting prices. The ECB hopes that by raising rates in the middle of a sticky period for the economy, it sends a message that it is serious about controlling inflation.
Should other central banks do the same? Inflation expectations have risen in Britain and America too. But these countries have been hit harder by the credit crunch and by falling house prices. On Thursday payroll figures in America showed an overall loss of 62,000 jobs in June. In such a fragile environment, policymakers in these two countries may judge that it will be harder for workers to get higher wages and for businesses to push up prices. The ECB is cautious because more rigid markets for jobs and products across the euro area mean prices are less likely to respond to economic weakness.
Unless oil prices suddenly drop, euro-area inflation is set to stay around 4% for the next few months. The betting in financial markets is that the central bank will follow up with at least one more quarter-point increase in interest rates to show that it means business. But Mr Trichet struck a less hawkish note, saying the ECB “no bias” about future moves. With the economy stuttering, he probably hopes that one interest rate rise will suffice.
Commentary by Margaret Carlson
July 3 (Bloomberg) -- We are in the middle of another episode of You Hurt My Feelings, starring this year's presidential candidates. Try this game at home and your chances of divorce skyrocket. But in public, it's a popular sideshow.
The latest round began when General Wesley Clark, a recent supporter of Barack Obama (he was ardent for Hillary Clinton until a few weeks ago) raised the volume on a mini-Swiftboating of Senator John McCain on a June 29 television appearance.
When asked on ``Face the Nation'' if he really thought McCain was ``untested and untried,'' Clark more or less answered yes, although he paid homage to McCain's honor and heroism. McCain, Clark said, lacked executive military experience because he only commanded a small ``wartime squadron,'' didn't make decisions, or order ``bombs to fall.''
Obama called Clark's remarks ``inartful.'' Only if that's a synonym for ``stupid'' did Obama get it right. Clark's statement is an example of being right on the facts and wrong on everything else.
Then, rather than retreat, Clark tried to explain himself for days, whenever a microphone presented itself: ``I don't think riding in a fighter plane and getting shot down is a qualification to be president.''
Home on a Stretcher
Reminding ABC television viewers that he was ``someone who came home from Vietnam on a stretcher,'' Clark said being a fighter pilot as McCain was isn't as much of a qualification as being ``in the highest levels of the military and having to work with the president.''
Guess who has that experience on his resume, and ran on it as the basis for his own presidential candidacy in 2004? That would be Clark, who served as supreme allied commander of NATO, heading up the mission in Kosovo.
That wasn't enough to get him into the first tier of the presidential race four years ago, and his latest remarks are sure to disqualify him from being short-listed for the vice presidency in this one.
Here's the calculus a ninny could make: ANY military experience trumps NO military experience. Even weekend warrior George W. Bush's spotty National Guard service trumps Obama's zero service. And McCain's heroism came not from being shot down over North Vietnam but refusing an offer to leave his jail cell because he wouldn't abandon his fellow prisoners.
Forget Experience
Experience is an argument Obama should avoid altogether, since next to McCain's three decades in public office, Obama's four years in the Senate look slight. The only time Obama should utter the word is to point out that experience didn't stop McCain from helping get us into a disastrous war.
The good news for McCain in the You Hurt My Feelings game is that after Clark, the next move was his.
The trick of playing smartly is to stifle any glee at the opportunity and not go too far. Be aggrieved not for yourself and risk looking whiney, but on behalf of an entire group. Don't get so angry as to look unbalanced, nor so placid as to look vulnerable like John Kerry. Count on the press to ask for your reaction rather than offer it up yourself.
McCain waited to be asked about the incident after Obama ignored Clark's crusade. On his way to Colombia, the senator said it's up to Obama to cut him (Clark) loose.'' Then Senator Lindsey Graham of South Carolina took over, countering Clark point by point.
No Slouches
McCain is a varsity player. During the primaries, former Governor Mitt Romney was constantly called to task for slights, real and imagined, against the Arizona senator.
Obama and Clinton are no slouches. Remember when Geraldine Ferraro said Obama wouldn't be where he was if he were white? Vile, yes, and good for a week of apologies by the Clinton campaign, followed by Ferraro being deep-sixed.
Then, with almost no provocation except a leaflet from the Obama campaign questioning her stance on trade, Clinton got huge coverage for scolding him for supposedly distorting her record. ``Shame on you, Barack Obama,'' she said without saying what exactly the offense was.
More recently, McCain adviser Charlie Black said in a magazine interview that the assassination of former Pakistani prime minister Benazir Bhutto before the New Hampshire primary ``helped us,'' by highlighting that McCain ``is the guy who's ready to be commander-in-chief.'' To drive home the point, he also said a ``fresh terrorist attack certainly would be a big advantage'' politically.
Correct, but Moronic
Like Clark, Black was mouthing conventional wisdom, but was a moron for doing so. The Obama camp blasted Black in much the same way McCain's people went after Jim Johnson, a member of Obama's vice presidential search committee, after the disclosure of a sweetheart loan from Countrywide Financial Corp. Black has survived; Johnson went under the bus.
Clark isn't the first person associated with Obama to wonder how germane McCain's military experience is to the experience needed in the Oval Office. He was just louder and more insistent.
Until a few weeks ago, Clark was making ``inartful'' comments for Clinton, comparing her service as first lady representing America abroad favorably to McCain's military service. As a recent convert, Clark thought that kneecapping someone in broad daylight would prove his mettle and speed his ascent in Obamaland.
The smart strategy is never to give offense, only take offense -- and use it. And try to keep the people who can be called ``surrogates'' limited. The most tangential supporter can get a spot on cable TV these days and leave you off-message for days.
The latest salvo comes from McCain surrogate and fellow POW Orson Swindle, who denigrated Clark's days as NATO commander, calling them ``less than stellar.'' Does this mean Clark now gets a surrogate to defend himself against a McCain surrogate?
That's the problem with the game. It never ends. You are more likely to win if you don't play.
July 3 (Bloomberg) -- The euro fell the most against the dollar in more than three weeks after European Central Bank President Jean-Claude Trichet signaled that he may not increase interest rates again.
The 15-nation euro also dropped against the pound as Trichet said that he has ``no bias'' or ``pre-commitment'' following the decision to raise the ECB's main refinancing rate by a quarter-percentage point to 4.25 percent. His comments helped counter a Labor Department report showing U.S. employers eliminated jobs in June for a sixth consecutive month.
``Trichet obviously disappointed market expectations,'' said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, the world's largest custodial bank, with about $23 trillion in assets under administration. ``He wants to start with a clean slate, and that has taken away a lot of expectations of further rate hikes.''
The euro dropped 1.1 percent to $1.5714 at 10:59 a.m. in New York, from $1.5882 yesterday. It rose to the all-time high of $1.6019 on April 22. Against the pound, the euro deceased 0.5 percent to 79.25 pence, from 79.70 pence. The dollar increased 0.8 percent to 106.73 yen, from 105.91. The euro fell 0.3 percent to 167.71 yen, from 168.20.
Today's interest-rate increase will help the central bank bring inflation back below 2 percent, Trichet said at a press conference in Frankfurt. Economic growth may weaken to 1.5 percent next year from 1.8 percent this year and 2.6 percent in 2007, according to ECB staff.
`Done for Now'
``The key phrase is he has `no bias,''' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``The ECB is done for now.''
Traders reduced bets the ECB will increase rates further this year. The implied rate on the December Euribor interest- rate futures contract fell to 5.14 percent, from 5.28 percent yesterday. The yield advantage of two-year German bunds over comparable-maturity Treasury notes decreased to 1.92 percentage points, making the European securities less attractive to investors.
ECB policy makers raised their target lending rate after holding it at 4 percent for more than a year. The decision was forecast by 57 of 58 economists surveyed by Bloomberg News.
French President Nicolas Sarkozy, who has criticized Trichet for not following the Fed's example of cutting interest rates, said last week on France 3 television that the ECB ``should ask itself the question about economic growth in Europe and not only inflation.''
June Meeting
When Trichet signaled after the June 5 policy meeting that an interest-rate increase this month was ``possible,'' the euro increased 1 percent against the dollar.
U.S. payrolls fell by 62,000 last month, following a revised decline of 62,000 in May, the Labor Department said today in Washington. The median forecast of 81 economists surveyed by Bloomberg News was for a reduction of 60,000. The jobless rate remained at 5.5 percent after jumping in May by the most in two decades.
The dollar briefly pared its gain against the euro after a report showed U.S. service industries unexpectedly contracted in June as orders and employment fell. The Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the economy, decreased to 48.2, the lowest since January, from 51.7 in May. A reading of 50 is the dividing line between growth and contraction.
Fed Rate Outlook
Futures on the Chicago Board of Trade showed an 18 percent chance the Fed will increase its target rate for overnight lending between banks by a quarter-percentage point at its Aug. 5 meeting, compared with 25 percent odds yesterday.
The U.S. currency dropped 1.2 percent against the euro last week in its second consecutive weekly loss after the Fed gave no indication on June 25 that it will start reversing the most aggressive series of cuts in two decades. The central bank held the fed funds target steady, saying in its statement that ``uncertainty'' about the inflation outlook remains high.
President George W. Bush said yesterday at the White House that ``we're strong-dollar people'' before leaders of the Group of Eight begin a three-day summit in Toyako, Japan, on July 7. Fed Chairman Ben S. Bernanke said in early June that he's ``attentive'' to the effect of the dollar's decline on inflation.
The dollar has lost 11 percent against the euro since the Fed made the first of seven reductions in the target lending rate from 5.25 percent in September.
July 3 (Bloomberg) -- U.S. stocks climbed, paring a fifth week of losses for the Standard & Poor's 500 Index, after a drop in jobs and a contraction in service industries bolstered speculation the Federal Reserve won't raise interest rates.
The Standard & Poor's 500 Index advanced after earlier dipping below 1,252.12, marking a 20 percent decline from its Oct. 9 record. JPMorgan Chase & Co., General Electric Co. and General Motors Corp. helped lead the rebound as traders boosted bets that the central bank will hold its benchmark lending rate steady at its August meeting. Massey Energy Co., the S&P 500's best performing stock in 2008, led energy shares higher after oil rose for a third day.
The S&P 500 added 6 points, or 0.5 percent, to 1,267.52 at 11:37 a.m. in New York. The Dow Jones Industrial Average, which slipped into a bear market yesterday after falling 21 percent from its October record, added 89.4, or 0.8 percent, to 11,304.91. The Nasdaq Composite Index rose 4.72, or 0.2 percent, to 2,256.18.
``There's no way the Fed is going to increase interest rates while we're losing jobs,'' said Michael Mullaney, a Boston-based portfolio manager at Fiduciary Trust Co., which manages $10 billion. ``We're definitely positioning our portfolios to take advantage of at least a benign Fed.''
Futures trading showed 82 percent odds that policy makers will keep the central bank's benchmark interest rate at 2 percent next month, up from a 75 percent chance yesterday. The Labor Department said payrolls fell by 62,000 in June, the sixth straight month of declines. Economists surveyed by Bloomberg had forecast a decrease of 60,000 jobs. The jobless rate remained at 5.5 percent.
U.S. exchanges will close at 1 p.m. New York time ahead of the Independence Day holiday tomorrow.
Banks Gain
JPMorgan, the third-biggest U.S. bank, added 51 cents to $35.11. Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, gained for a third day after falling to an eight-year low to start the week. The S&P 500 Financials Index climbed 1 percent for the top gain among 10 industries.
GE, the world's fifth-largest company by market value, added 52 cents to $27.03. GM, which fell to the lowest level since 1954 yesterday, climbed 35 cents to $10.33.
Massey Energy Co., the biggest producer of eastern U.S. coal, increased $1.36 to $76.23, bringing its gain for the year to 113 percent. Energy producers rose 0.5 percent for the second-biggest contribution to the gauge's advance after Nymex crude futures drew within 15 cents of $146 a barrel.
Penn National Rallies
Penn National Gaming Inc. gained $2.36 to $30.96. The company's $6.1 billion takeover by private-equity investors Fortress Investment Group LLC and Centerbridge Partners LP was scrapped. Penn will receive $225 million to terminate the takeover and $1.25 billion in preferred equity. Shares of the Wyomissing, Pennsylvania-based company fell 16 percent over the previous five sessions. Nvidia Corp. sank $5.28, or 29 percent, to $12.75, the steepest drop in the S&P 500. Sales this quarter will decline to between $875 million and $975 million, the company said. The second-biggest U.S. maker of graphics processors predicted in May that revenue would decline 5 percent from the previous period's $1.15 billion, indicating about $1.1 billion. The company will also record costs of as much as $200 million because of a defect in some laptop chips.
Health Net Inc. lost $3.54 to $22.10. The provider of health benefits was cut to ``sell'' from ``neutral'' by Goldman Sachs, which said its customers are concentrated in areas UnitedHealth Group said yesterday were difficult. Aetna Inc., which Goldman also cut to ``sell,'' lost $1.99 to $37.80.
Stocks tumbled yesterday after oil rose to a record and steelmakers and coal producers retreated on concern the economic slump will worsen. The 30-stock Dow average extended its decline from the October record to more than the 20 percent, the first time since 2002 the gauge has closed below the threshold that signals a so-called bear market.
July 3 (Bloomberg) -- European Central Bank President Jean- Claude Trichet played down prospects of further interest-rate increases, saying the quarter-point move today will help bring inflation back below 2 percent.
``Today's decision will contribute to achieving our objective,'' Trichet said at a press conference in Frankfurt after the ECB raised its benchmark lending rate to 4.25 percent. Trichet said he has ``no bias'' on further moves.
The euro slumped against the dollar and European government bonds rose after Trichet's remarks. The ECB is weighing the risk that higher rates will exacerbate an economic slowdown against the danger that the fastest inflation in 16 years will feed into wages and prices.
Trichet ``suggested they currently have no plans to raise interest rates again,'' said Dario Perkins, an economist at ABN Amro NV in London. ``Of course, that doesn't rule out further moves. It will depend on what happens to inflation and, more importantly, inflation expectations.''
The euro dropped 2 cents to $1.5703 at 10:47 a.m. in New York. It rose to the all-time high of $1.6019 on April 22. The yield on the German two-year note fell more than 20 basis points to 4.49 percent.
Striking a Balance
Trichet's comments may reflect the balance he must strike between adhering to the ECB's mandate and acknowledging the growth concerns of some euro-region countries that have been hurt by a real-estate bust.
French Finance Minister Christine Lagarde said today that higher rates may hurt Europe's competitiveness by pushing the euro up against the dollar as the U.S. Federal Reserve keeps its key rate at 2 percent.
Trichet said last month that some of the ECB's 21 policy makers were against increasing borrowing costs. Today he said the decision to raise rates was ``unanimous.''
``We find it hard to believe that no central bank representative from any of the 15 member states voiced his opposition today, especially given the growing pessimism and dire conditions in some countries,'' said Kenneth Broux, an economist at Lloyds TSB Corporate Markets in London. ``This would imply that Ireland and Spain agreed with today's rate increase, despite the crisis in their construction and real estate markets.''
Inflation Concerns
Still, the ECB sees ``increasing upside risks'' to price stability, which it defines as keeping inflation just below 2 percent over the medium term, Trichet said. The bank has ``no pre- commitment'' and will do whatever is necessary to combat inflation, he added.
Oil prices have doubled over the past year, driving inflation to 4 percent in June. They breached $145 a barrel for the first time today.
Unions are already pushing through bigger pay claims. European labor costs rose 3.3 percent in the first quarter from a year earlier, the most in almost five years.
Trichet took economists by surprise last month when he said the ECB may raise rates. Since then, inflation expectations, as measured by the breakeven on five-year French inflation-indexed bonds, have increased. They reached a record 2.83 percent today.
``If they need to move again, then they will,'' said Charles Diebel, head of European interest-rate strategy in London at Nomura International Plc. ``We sense that they are simply not sure whether they will have to move again and likewise are nervous about the decision they have just taken in terms of the risks to growth it presents.''
Slowing Growth
Companies may find it more difficult to raise prices and wages as the economy cools. European manufacturing contracted in June, confidence dropped and retail sales plunged.
Growth may weaken to 1.5 percent next year from 1.8 percent this year, according to ECB staff projections. Trichet said economic fundamentals are still ``sound,'' even with ``high'' uncertainty surrounding the outlook.
Even after today's comments, investors are fully pricing in another quarter-point rate increase to 4.5 percent by the end of the year, Eonia swap contracts show. They scaled back bets on a third move by March, with the contract dropping 10 basis points to 4.7 percent.
Central banks from Russia to Brazil are raising borrowing costs as inflation replaces the global credit crunch as their biggest concern. Indonesia today increased its key rate for the third time in as many months and Sweden's Riksbank lifted its benchmark to a 12-year high.
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