Opening salvos...

A historic day for bonds and the dollars yesterday. Quantitative easing being bandied about by most folks as "the reason" for the dollar decline.

But what happens when QE becomes a competitive sport? Recall the Weimar Republic vs. The U.S. experience.

By Gabi Thesing

March 19 (Bloomberg) -- The European Central Bank is under increasing pressure to follow the U.S. Federal Reserve and start buying government or corporate debt to revive its economy, economists said.

The ECB’s inaction is “becoming untenable, with every major central bank in the world actively fighting deflation risks through the purchase of government debt,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc in London. “The pressure on the ECB to act sooner rather than later will not only come from other central banks in the world but also via the exchange rate.”

The euro yesterday rose the most against the dollar in almost nine years, surging more than four cents to $1.35, after the Fed said it will purchase as much as $300 billion of U.S. government bonds. While ECB President Jean-Claude Trichet argues his policy of loaning banks unlimited funds is sufficient for now, a stronger currency will squeeze European exporters already struggling with a collapse in global orders. That may push the 16-nation euro region deeper into recession.

“This is a form of monetary tightening that is difficult for the euro zone to countenance and the ECB will be frustrated that this has been thrust upon the currency union,” said Geoffrey Yu, an analyst at UBS Ltd. in London. “Some tough choices are necessary for the ECB as current monetary policy is no longer sustainable in a recessionary environment.”

Quantitative Easing

The ECB’s benchmark interest rate, at 1.5 percent, is the highest among the Group of Seven industrialized nations. The Fed and the Bank of Japan have lowered their key rates to close to zero and the Bank of England’s is at 0.5 percent. All three of those central banks have said they will purchase government bonds in an effort to reduce long-term interest rates and revive economic growth, a policy known as quantitative easing.

European government bonds surged today, pushing yields down by the most since at least 1999, in anticipation of the ECB embarking on a bond-purchasing program, said Juergen Michels, chief euro-area economist at Citigroup Inc in London.

The yield on the 10-year bund, Europe’s benchmark government security, fell as much as 22 basis points. It was 17 points lower at 3.05 percent by 8:33 a.m. in London.

“The markets expect that the ECB will be the next on the bloc,” Michels said. Still, “bond prices will come down again once the market realizes that nothing is imminent.”