Monday June 14, 2004 - 12:42:33 GMT
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GVI -- Forex Strategy Session for the dollar at the NY open
The dollar is maintaining a strong tone heading into trade for the new week. Comments by Minneapolis Fed President Stern Sunday followed a similar point of view from Guynn and Pianalto on Friday reinforcing the view that the primary focus of the central bank has shifted to inflation from spurring employment growth. The May CPI report on Tuesday will be of paramount importance. Market forecasts for the data center around a rise of 0.4 or 0.5% in the month after +0.2% in April. The core rate is seen rising +0.2% vs. +0.3%. Some feel a significantly higher than expected core rate of inflation could trigger a 50 bp Fed hike on June 30. A 25 bp move is currently priced in. Today the markets are expecting a robust May Retail Sales report at 12:30 GMT.
New questions are being raised in Germany about the reform of social welfare programs of Social Democrat leader Schroeder, following a very poor showing by his party in EU parliamentary elections. Incumbent parties fared poorly pretty much throughout Europe, with Blair and Berlusconi also losing ground also due to their support of the Iraq war. On the continent, voters are generally unhappy with economic stagnation and the persistently high level of unemployment. These problems can be traced back to structural rigidities and the policies of the ECB. This is the main reason why the euro is not an attractive dollar alternative, but it is still the only game in town.
In Asia, the Hang Seng tumbled by 319 points today on another hint that China is considering raising interest rates. We have noted that speculation has centered on a 100 basis point rate hike in July. China's producer prices rose 5.7% in May, the government said today. Traders have been worried that a hard landing in China could put pressure on the yen and Aussie$. The Nikkei fell 35 points today. Premier Wen Jiabao was cited as saying by the official Xinhua News Agency Sunday saying China faces a tough job in trying to slow growth that's spurred raw-material shortages and transport congestion. On the other hand, the BOJ is meeting Monday and Tuesday and is expected to try to reassure the JGB market, which has continued to tumble, that the banks ultra-easy monetary policy is not about to change. Their policy announcement is due on Tuesday.
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