The euro is now travelling in an opposite direction to the US Dollar following the European Central Bank’s decision to raise interest rates to a seven-year high in order to fend off inflation.

The quarter-point rise in the main interest rate to 4.25 per cent was enthusiastically greeted by the Peer Steinbrück, the German finance minister, who had this to say:

“I am convinced that there is a high probability that we can overcome the financial turmoil during the next year or year-and-a-half. But I think worldwide inflation will affect us for a longer time,”

We tend to agree with him about inflation being around for a long time to come but in our humble opinion the financial turmoil that we are all embroiled in could also take a long time to resolve. We have had the first wave of the credit crunch resulting in the demise of the Northern Rock and Bear Stearns. The rumours now swirl and surround other financial institutions including Lehman Brothers, Citibank Merrill Lynch, et al. In the flight for safety the euro could be perceived as a better place to store cash than the US dollar as the returns are better and the dollar is almost friendless at the moment

The market was calmed some what by the banks accompanying statements that suggested no further rate rises in the near future. This statement caused the euro to fall slightly with the dollar gaining on the news.

To read the article in full by the Financial Times please click here.

It’s a strange thing about inflation, everything else gets the blame for it except those who are operating the printing presses and producing paper currencies as though it does not matter, they are in for a rude shock.

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