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Does the European Central Bank Have Big Changes in Store for Interest, Exchange Rates?

NEW YORK (TheStreet) -- Big news for international economic policy watchers: the European Central Bank kept interest rates unchanged at its monthly meeting which concluded earlier today -- but there was also a big hint that something will happen at the June meeting.

The European economy may no longer be in crisis, but growth rates have been lower than the U.S., and unemployment rates much higher. While the Federal Reserve has been tapering over recent months, the debate in Europe has been whether to unleash further policy stimulus. Such an action has been gaining political support, with the French Prime Minister calling for both further economic stimulus efforts and a lower value of the euro.

The general perception was that the independent European Central Bank, with its dogged focus on maintaining a low inflation rate, was highly reluctant to either implement greater stimulus or explicitly weaken the strong euro.

However, fifteen minutes into May's ECB press conference, President Mario Draghi said something that caught market watchers by surprise:

"We had a discussion on the exchange rate... not a policy target but very important.... The strengthening of the exchange rate in the light of low inflation is of serious concern to the Council."

He then followed this up by saying that the ECB was "comfortable with acting next time" -- a reference to the potential announcement of new stimulus measures for the European economy.

To put this into context, these two announcements in unison would be like Janet Yellen telling the world's media that not only was she going to stop tapering but she also though the dollar was a bit too high.

The financial markets inevitably responded by pushing the euro down. European equity markets were also marked higher in anticipation of some stimulus news.

So why the sudden rush?

Recent forecasts have pushed down future inflation forecasts for Europe, raising the risk. This gives the ECB more room to maneuver, while still being able to say the bank anticipates hitting its 2% inflation target. Additionally, the crisis in Ukraine carries the risk of some spillover economic impact on regional growth rates, which is not good news given the still-fledgling status of the European recovery.

Of course there is no certainty about policy action in June. But these indications do raise hopes that policymakers within Europe are finally realizing that they did need to support the recovery more.

That is good news for global economic growth rates and any companies selling products into the European economy. It should also be good news for the U.S. dollar against the euro.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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