It's been said that old habits die hard.

And one habit likely to change is European Central Bank President Jean-Claude Trichet's penchant for delaying interest rate cuts until the last possible moment, so says economist Richard Felson.

"In this case, Trichet will be joining the Fed's rate cut party this fall," Felson told BloggingStocks. "In fact, if economic conditions continue to worsen in Europe, they may even precede the Fed with a rate cut." The ECB next meets to discuss rates on September 4; the Fed, on September 15.

The Fed, as investors / readers are aware, has paused in its rate cut cycle, after decreasing interest rates by 325 basis points, to 2% from 5.25%, in an effort to jump-start a U.S. economy dragged down by its worst housing slump in a generation. Meanwhile, the ECB has remained in restrictive monetary policy mode - - first increasing its refinance rate by a quarter-point to 4.25%, in mid-2008, then taking a stand-pat stance, citing inflation pressures.

In the final analysis, the European Central Bank may not attend the Fed's rate cut party, after all.

ECB President Jean-Claude Trichet said Thursday the ECB may increase interest rates as soon as next month to check euro-zone inflation, Bloomberg News reported Friday.

On Thursday, the ECB kept its key, short-term interest rate at 4%. That pause, combined with the U.S. Federal Reserve's rate cut pause, suggests that the world's two strongest central banks believe there may be enough monetary stimulus in the system to avert a regional recession prompted by the worst housing slump in the United States in more than 15 years.

Trichet: the hawk of hawks

The Fed has cut short-term interest rates by 325 basis points to 2% since September 2007. Further, while some economists had forecast a mild ECB easing in mid-2008 to stimulate euro-zone growth and avert a regional recession, throughout the Fed's easing cycle Trichet has maintained his notoriously hawkish stance and has repeatedly underscored the need to check oil-fed inflation in Europe.

Inflation is running about at 3.1% annual rate in the euro-zone, and May data indicated inflation continues to trend higher. Trichet's Thursday comments represent the most specific signal to-date from the ECB that the bank's bias concerns checking inflation, not stimulating growth, given its read on economic conditions.

Economic Analysis: Trichet's stance is not surprising, but in this case he may be hitting the monetary policy brake too soon. The legendary inflation hawk would dearly love to get out of this economic slowdown without an interest rate cut, but it may not be possible. Economic growth in the euro-zone's border economies is slowing, while the U.S. economy is barely showing a pulse. If the euro-zone falls into a recession, Trichet's hawkish stance will be viewed as a needless -- and avoidable -- monetary policy error.

Inflation in Europe's euro-zone accelerated in May 2008, as the rising price of oil took its toll on prices at the consumer level.

Inflation increased to a 3.6% annual rate in May 2008, up from a 3.3% annualized rate in April 2008, EuroStat, the European Union's economics statistics office, announced Friday (pdf). It was the highest year-over-year inflation increase in 16 years.

Economists surveyed by Bloomberg News had expected euro-zone inflation to register a 3.5% annual pace in May 2008.

The European Central Bank's official inflation target is below 2%. The ECB has failed to keep inflation below this level for 10 consecutive years.

Further, although inflation had trended up above 3% in recent months, economists had argued that inflation still was not high enough on the continent to rule-out a reduction in short-term interest rates.

To jump-start the U.S. and regional economies, the U.S. Federal Reserve has cut short-term interest rates by 325 basis points to 2% since September 2007, while the Bank of England has cut its key rate three times to 5%. Meanwhile, the ECB has kept its key rate the same, at 4%, with ECB President Jean-Claude Trichet repeatedly underscoring the risk to the euro-zone economy from high-oil-cost-driven rising inflation.

Hence, May 2008's accelerating inflation may very well convince the ECB to not only maintain interest rates at current levels, but raise rates as 2008 progresses.

Economic Analysis: Another negative data point for both regional and global growth, as rising euro-zone inflation gives more fodder to the ECB hawks to maintain short-term interest rates at current levels. Further, given ECB President Trichet's inflation control penchant, the odds of a rate cut stand at about 10-20%: an ECB rate freeze is not what the west needs to stimulate demand, but the ECB is not likely to budge, unless euro-zone GDP growth slows considerably in Q3 2008.

Could ECB President Jean-Claude Trichet be compelled to modify his legendary hawkish stance regarding inflation?

He might, if sentiment against the ECB inflation target continues to mount. Bloomberg News Tuesday quoted London-based Morgan Stanley co-chief economist Joachim Fels as concluding that the ECB's goal of lowering inflation below 2% as unachievable and not credible. "The ECB's keeping up a fiction," Fels said, adding that the ECB should adjust the target.

As part of an effort to jump-start a U.S. economy slowed to a crawl by the nation's worst housing recession in more than 15 years, and to prevent a global economic slowdown, the U.S. Federal Reserve has cut short-term interest rates by 325 basis points to 2% in the past year. Further, to stave off a potential regional and global slowdown, the Bank of England has cut its key rate three times to 5%.

Europe's economy grew more than forecast in Q1 2008, the European Union's statistics office announced Thursday, as Germany's economy continues to bolster the continent's results.

Euro-zone GDP increased 0.7% in Q4 2008, 0.2 percentage points above the Bloomberg News survey consensus estimate.

Germany served as the primary economic engine, recording 1.5% in the quarter – its fastest growth in 12 years, Bloomberg News reported Thursday. Meanwhile, France registered 0.6% GDP growth. Together, Germany and France account for about 50% of the euro-zone's GDP.

On a year-over-year basis, euro-zone GDP increased 2.2% in the 15-nation group. Growth in the 27-nation European Union increased 2.4%.

However, despite the upside GDP surprise from both the euro-zone and Germany, key economic officials downplayed the results. European Central Bank President Jean-Claude Trichet told Reuters the news, while positive, simply confirmed what he had expected – that Q1 2008 would be good and the ensuing period slower.

A hint by Trichet?

Economist David H. Wang told BloggingStocks Thursday there could be a glimmer of hope for those who favor an interest rate reduction by the ECB. It was unusual for the ECB's Trichet to reference slower growth after the release of a GDP report, he said. Trichet, an inflation hawk, regularly speaks of Europe's industrial capacity and price pressures in the context of GDP, Wang said.

"I don't know if this was a hint, or perhaps a mini-hint, regarding monetary policy," Wang said. The currency market shrugged-off Trichet's comments, with both the euro and British pound remaining at essentially the same levels they were earlier in the day versus the dollar, at $1.5440 and $1.9445, respectively.

Euro-zone inflation hit a new record annualized rate of 3.3% in February 2008, the the E.U.'s Eurostat office announced Friday, as surging oil prices began to feed through the price system. (pdf)

The 3.3% annualized rate represent 0.1% increase from the previous estimate of 3.2%, which was also a record. The euro-zone is a 15-nation region that uses the euro currency.

The core rate, which excludes the often-volatile food and energy costs, increased at a 2.4% annualized rate.

In February 2008 energy prices increased an alarming 10.4% on a year-over-year basis, Eurostat said, while food and transportation costs rose 5.8% and 5.4%, respectively, on a year-over-year basis.

Economic Analysis: The February 2008 statistics indicate that euro-zone inflation is beginning to show the effects of surging oil prices. Increased energy efficiency, a lower per capita energy use rate, and a rising euro had heretofore been able to diffuse the rise in energy costs, particularly oil, but oil's relentless march higher finally enabled energy costs to filter through to the economy.

Further, retail inflation is above the European Central Banks target of just below 2%. If the core rate continues to rise, that will make it harder for the ECB to cut benchmark, short-term interest rates to stimulate Europe's economy, which is likely to slow this year, due to the U.S. economic slowdown.

The dollar plunged to a two-year low versus Japan's yen Tuesday, and retreated against other major currencies, on fears the U.S. economy has fallen into a recession, Bloomberg News reported.

The dollar fell 1.26 yen to 106.90 versus the yen. Meanwhile, the British pound rose about 1.5 cents to $1.9704 in mid-day Tuesday trading. The dollar was virtually unchanged versus the euro at $1.4862.

Economists and analysts say a recession in the United States would invariably drive the dollar lower, due to foreign investors' reduced demand for dollar-denominated U.S assets, many of which would underperform during a recession. The dollar also would be hurt by lower interest rates, a near-certainty in the months ahead, with the U.S. Federal Reserve widely expected to again cut benchmark, short-term interest rates to jump start the U.S. economy.

The European Central Bank and the Bank of England both kept benchmark interest rates the same Thursday, The Associated Press reported -- a monetary policy status-quo for at least the time being, as economists and analysts await further data on the extent of the U.S. economic slow down.

The ECB kept its key rate, the refinance rate, at 4%, while the BOE maintained its rate at 5.5%.

The central banks' decision had a mixed impact on the currency markets, with the euro rising about 1 cent to $1.4737, and the pound remaining virtually unchanged versus the dollar at $1.9588.

Somewhat surprised by BOE

Currency trader Andrew Resnick, told BloggingStocks Thursday traders were somewhat surprised by the Bank of England's stand-pat decision, less so by the ECB verdict.

"Many thought the Bank of England might lower rates slightly, given the softness they're beginning to see in consumer spending and housing," Resnick said. "The ECB was not a surprise because they've been the toughest major central bank on inflation since I started trading 10 years ago."

The new year should experience a sight not seen in currency markets for several years -- a rally by the U.S. dollar -- currency traders and economists told BloggingStocks on Thursday.

The euro, which traded Thursday at $1.4620, is up about 13% vs. the dollar this year, and about 21% since January 2006. The British pound, which traded Thursday at about $1.9930, is up about 2% vs. the dollar this year, and 11% since January 2006.

Independent currency trader Michael Murphy told BloggingStocks on Thursday that the market fundamentals "do not justify a dollar at these levels," and that the dollar has been oversold in the currency markets, particularly against the euro and the pound.

"U.S. economic fundamentals have been weak the past several years, as they relate to the dollar, but the market has compounded this by speculative shorts, pushing the dollar down. But the economic fundamentals are improving, so when the these speculative shorts unwind, the dollar will rebound in 2008," Murphy said. "The U.S. trade deficit's decline will be a big factor in the dollar's rise in 2008."

Murphy added that he expects the dollar to improve to $1.30 vs. the euro and $1.85 vs. the pound by the end of 2008.

China and the United States on Wednesday agreed that the relationship between the world's two largest economies is becoming increasingly interdependent but again differed on the pace of Chinese currency reform, as trade talks between the two nations continued in Beijing, The Associated Press reported.

Separately, U.S. officials pronounced as a success a side process Tuesday during which the two sides signed several agreements, including one on food safety, calling for U.S. health inspectors to play a greater role in inspections in China itself, the International Herald Tribune reported.

There are signs that Europe's laissez-faire stance toward the Euro may not remain so laissez-faire in the months ahead.

European officials from a variety of corners - - public, private, corporate - - are beginning to express concern about the increasingly strong euro currency.

In the German weekly Welt am Sonntag, Airbus CEO Louis Gallois indicated that the strong euro will affect Airbus' sales and competitive position versus rival The Boeing Company (NYSE: BA): "It is very clearly an existential threat -- not immediately, but in the long-term," Gallois told the newspaper. "On this basis we can no longer plan effectively for the future."

Airbus sells its planes in dollars but about half its costs are in euros, which makes the company sensitive to a rise in the euro vs. the U.S. dollar, despite the company's hedging efforts.

Sudden large, negative financial events can disrupt, or at least critique, even the most bedrock economic tenets, let alone recently-percolated conventional wisdom.

On the heels of the housing and credit market crunches, one conventional wisdom item that's currently coming under criticism is the notion of "decoupling" [Subscription required] - the theory that despite a slowing U.S. economy, the European and Asian engines of growth would be sufficient to maintain adequate global GDP growth, The Wall Street Journal reported.

The International Monetary Fund published a chapter in April 2007 entitled "Decoupling the Train," which argued that the U.S.'s mild GDP growth was caused by a housing sector correction. Housing was less global than other commodities, it argued, and hence would not impact the world economy as much.

For example, about two months ago, the IMF projected that global economic growth would slow just slightly in 2008 to 4.8% from 5.2% this year.