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U.S. Spillover Risks Stifling Europe and Spurring ECB into Action Mike Dolan

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LONDON, Feb 24 Reuters When U.S. interest rates sneeze, Europe catches a cold.

Market anxiety about the inflationary impact of the U.S. governments massive planned spending boost is driving up U.S. Treasury yields and undermining the dollar.

That risks stifling Europes recovery with a stronger euro and relatively higher real borrowing rates, even though Europes fiscal stimulus is dwarfed by Washingtons 1.9 trillion plan.

Absent another government spending push in Europe to match the go big drive of new U.S. President Joe Biden, markets suspect the European Central Bank ECB may be forced to push back with even more bond buying to calm the waters.

ECB chief Christine Lagarde sent the first shot across the bows on Monday saying the central bank was closely monitoring the evolution of longerterm nominal bond yields.

But her verbal protest had only a fleeting impact on nominal yields and didnt stop inflationadjusted, or real, German yields hitting a fourmonth high on Tuesday.

Its the contrast in inflation expectations and the resulting relative real rates either side of the Atlantic that are storing up trouble for Frankfurt and, unhelpfully for the euro zone at least, lifting the eurodollar exchange rate again.

The rise in real yields in the euro area is more problematic, Gilles Moec, group chief economist at Axa Investment Managers, wrote this week.

This calls for action, and a decisive acceleration in PEPP purchases could do the trick, he said, referring to the…

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