Currency rates are after all the price of one money in terms of another. But currency values are not simply determined by the size or growth in relative money stocks. EMU money supply is now growing faster than the US money supply even though the euro is the strong currency and the dollar is the weaker one.

The ECB is worried about inflation at or close to its ceiling rate. The flash German HICP (released Sept 27th) shows that Germany has seen a turn for the worse in inflation trends in August. The ECB has been wary for some time of money and credit growth above its guidelines. But the ECB paused its tightening effort in the wake of the subprime mortgage crisis. It may soon find it has more work to do.

This notion, however, is complicated by the rise in the euro itself. In Germany unions are already urging the ECB to cut rates to take that upward pressure off the Euro. While it may seem odd for fast money growth to be associated with a rising currency, it is nonetheless true that the rising currency will help to contain whatever inflation pressures may be brewing inside the Euro area.

That is a Euro area dilemma. The euro has risen enough that it going to start to crimp growth. Indeed growth appears to have started to slow even before the Euro crossed the $1.40 threshold.