Trichet gives mkt green light to take euro higher

By Jamie McGeever - Analysis

LONDON (Reuters) - Tough anti-inflation rhetoric from European Central Bank President Jean-Claude Trichet on Thursday after the bank kept interest rates steady will cool hopes for a cut soon and probably fire the euro to new highs.

Trichet's comments suggest the increasingly divergent monetary policy paths being followed by the ECB and U.S. Federal Reserve will keep the euro on its upward path, with $1.55 and $1.60 the next main "round number" targets.

In a press conference after the bank left rates at 4 percent, Trichet stressed the ECB's commitment to maintaining price stability, declined to be drawn on the abruptness of the euro's current rally, and gave no indication whether slowing growth, tight lending conditions or broad market turmoil will prompt a rate cut soon.

Contrast that with the Fed, which has already slashed rates 225 basis points in a bid to stop the economy from tipping into a housing slump-led recession and is widely expected to cut rates again in the weeks and months ahead.

Increasingly, it seems the ECB is prepared to accept the strong currency keeping a lid on commodity and food price-fuelled inflation despite the potential hit to exports, while the Fed is willing to accept a weak currency and potential inflation hit as long as growth recovers.

David Bloom, global head of currency strategy at HSBC in London, noted Trichet's refusal to characterize the euro's appreciation as "brutal" -- a thinly-veiled form of verbal intervention he's used to tame euro strength in the past -- and how he deftly appeared to shift the responsibility of tackling unprecedented exchange rate extremes back to U.S. policymakers.

"They (journalists) tried to get him to say 'brutal' but he refused, and that's why euro/dollar is going up again," Bloom said.

"The possibility of a rate cut coming soon is not there. They (ECB) have put the onus of the currency back onto the U.S. - the dollar's the problem, not the euro."