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Forex Research - How Much Higher Can the US Dollar Rise?
â€˘ ECB: In State of Heighted Alert
â€˘ British Pound Hit By Dollar Strength
How Much Higher Can the US Dollar Rise?
So far it has been a very good week for the US dollar, which has seen
its biggest two day rise in 3 years. In fact, against every major
currency except for the Euro and Swiss franc, the greenback has erased
all of last weekâ€™s losses. Last night, in an exclusive interview with
The Times of London, US President George W Bush joined the chorus of
government officials calling for a stronger dollar. With no ambiguity
in his words, Bush said â€śwe want the dollar to strengthen.â€ť This
followed comments by Ben Bernanke who reminded the markets last night
that inflation is the central bankâ€™s top priority. According to the Fed
chairman, the FOMC will â€śstrongly resist an erosion of longer-term
inflation expectations, as an unanchoring of those expectations would
be destabilizing for growth as well as for inflation.â€ť Bernanke even
went so far as to say that despite the fact that the unemployment rate
jumped from 5 percent to 5.5 percent, the US economy has skirted a
major decline. If you recall yesterday afternoon, US Treasury Secretary
Paulson also said that he would not rule out any policy tool including
currency intervention. This clear and cohesive message reflects the
seriousness of the Bush Administration and their strong desire to see
the dollar rise (Will the Bush Administration Actually Intervene in the US Dollar?).
As a direct result of these recent comments, currency traders have sent
the US dollar higher for the second day in a row. Since the beginning
of this week, the US dollar has already appreciated 300 pips against
the Japanese Yen and close to 400 pips against the Euro. How much
higher the US dollar will rise will be largely dependent upon this
weekâ€™s retail sales report as well as this weekendâ€™s G7/G8 meeting.
With the labor market deteriorating, if higher gasoline receipts exceed
slower spending on other discretionary goods, retail sales could beat
expectations. Over the past 30 years, G7/G8 meetings have marked major
turning points for the US dollar. Even though only Finance Ministers
will be attending the meeting in Japan, intervention could still
happen. The US government already supports a stronger dollar, which
means that half of the battle for verbal intervention may have already
been won. However, it is the Europeans that need to be convinced. With
the ECB on a mission to do all that it takes to lower inflation, they
may not be willing to let the Euro weaken.
ECB: In State of Heighted Alert
Although the Euro has plunged close to 400 pips as the currency market
turned its focus to the comments made by US officials, traders should
not lose sight of hawkish comments that have also been made by the
European Central Bank. According to ECB member Liikanen, the central
bank is in a state of heightened alert. Along with central bank members
Liebscher and Noyer, Liikanen stressed the need to contain inflationary
pressures and how the rise in prices is making their jobs increasingly
difficult. Unsurprisingly, German wholesale prices increased more than
expected last month while industrial production beat expectations in
France and Italy. Growth in the Eurozone has been steady, which is part
of the reason why the ECB has felt comfortable enough to be exceedingly
hawkish. However the simultaneous hawkishness of the ECB and the
Federal Reserve is exactly what could keep the EUR/USD range bound for
at least the next 24 hours.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
British Pound Hit By Dollar Strength
Better than expected UK economic data has failed to help the British
pound extend its gains for the fourth day in a row. The RICS house
price balance was higher than expected last month, suggesting
stabilization in the housing market. Meanwhile retail sales as measured
by BRC also rose by the most in 4 months while industrial reproduction
rebounded. This should be welcome news for the Bank of England who like
the ECB needs to concentrate on containing inflationary pressures. If
growth continues to stabilize, a rate hike may even be possible.
However before that can even happen, we need to see an improvement in
the labor market. Tomorrow, the UK will be releasing its employment
report and their trade balance. Given the drop in the employment
component of the service and manufacturing PMI report, the pound may
not receive support it needs from the employment numbers.
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
Bank of Canada Leaves Interest Rates Unchanged at 3 Percent.
To the surprise of the markets, the Bank of Canada decided to leave
interest rates unchanged at 3.00 percent compared to the marketâ€™s
forecast for a quarter point cut. Although growth contracted by 0.3
percent in the first quarter and consumer confidence fell to a 7 year
low, the prospect of higher price pressures has reduced the BoCâ€™s
dovishness. According to the central bank, â€śif current energy levels
persist, total CPI inflation will rise above 3 percent later this
year.â€ť Therefore the current level of interest rates is â€śappropriately
accommodative.â€ť On growth, the BoC is not too worried as they believe
that the economy has moved into excess supply. As a result, they expect
growth to pick up this year and accelerate in 2009. The Bank of Canada
was the last central bank expected to ease interest rates and now that
they too have succumbed to inflationary pressures.
Tell us what you think on the Canadian dollar Forum.
USDJPY Hits 3 Month High
The US dollar hit a 3 month high against the Japanese Yen as broad
dollar strength led the currency pair higher. The other Yen crosses did
not fare as well however with the US dollar and the commodity
currencies the only ones rising against the Yen while the Euro, Swiss
Franc and British pound sold off. Stocks have failed to extend Mondayâ€™s
gains and its vulnerability is affecting the Yen crosses. Tonight, the
final numbers for Q1 GDP, the current account balance, the trade
balance and CGPI are due for release â€“ expect some action.
Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.
By Kathy Lien, Chief Strategist of DailyFX.com
Contact Kathy Lien about this article at [email protected]
Â©2008 DailyFX. All Rights Reserved.
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