The Dollar rallied sharply yesterday on hawkish comments from Paulson and Plosser

With little in the way of economic data yesterday comments from Treasury Secretary Paulson and Philly Fed President Plosser were always going to be a key focus for dealers and neither man disappointed.

Henry Paulson churned out the familiar party line that a strong dollar is important to U.S. interests and the underlying strength of the economy while Charles Plosser said that rising inflation could force the Fed to start raising interest rates before labour and financial markets recover.

Oil also played a part in the dollar's rise as the price of a barrel of oil dropped $4.63 to a six week low of $126.40 as fears of tropical storm - expected to turn hurricane - Dolly hitting oil production sites in Texas receded.

Reaction to Paulson and Plosser was enough to offset an earlier slide in the dollar triggered by weaker than expected earnings announced by Wachovia. America's fourth largest bank reported a record US$8.86 billion second-quarter loss and slashed its dividend for a second time this year.

Wachovia had projected a US$2.6 billion to US$2.8 billion quarterly loss and added to the gloomy news by announcing it will slash nearly 11,000 jobs.

The jobs news does not bode well for the US non-farm payrolls report due out next week which has already shown that the US economy has shed a total of 438,000 in the first six months of the year.

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To grow or not to grow?

Oil came off further yesterday at one point below $130 a barrel.

Rather than being a reduction in demand for oil it seems more centred on US sentiment that they would dip into their own strategic supply if necessary. On the back of this drop, the US Dollar made gains and the Dow Jones recovered somewhat, moving away from bear market country.

Oil was not the only mover with natural gas coming off recent highs to levels not seen since early May. It was also a much better day for equity markets with house builders and banks both making gains from their previous deflated levels.

Today we have seen the German Producer Prices Inflation figure which reported the highest rise in 26 years. As with other global PPI increases, this sharp rise is again on the back of high commodity and energy prices.

Since the release of the figures, Trichet has been talking about the lack of sustainable growth within the EuroZone now being the main focus.

This is starting to become a common trend amongst Central Bank Heads with Bernanke, King and now Trichet all indicating that they are not looking to try and manipulate inflation in the short term (a futile exercise anyway) but to concentrate on ensuring that growth is the immediate focus.

On the currencies Dollar sentiment is still somewhat tarnished as confidence in the US remains frail. The Fed's reluctance to increase rates, even with inflationary pressures, will have a knock-on effect on the Greenback.

As there is no data out from the US the main focus today will be the Dow Jones opening and the effect that Merrill Lynch's numbers release will have.

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Dollar weakness prevails

The value of oil came off yesterday, at one point down by $10 a barrel after concerns were again expressed about the state of the US economy and that this in turn, would lower demand for crude.

Bernanke's speech warned of "downside risks" to growth and "upside risks" to inflation causing the volatility in the oil and equity markets as the Dow and FTSE both made large losses on the day.

Yesterdays Retail Sales in the US saw a slight increase at 0.1% and if you strip out gasoline a decline of 0.5%. The US today sees CPI figures released expected to be around a 0.7% an increase to 4.5% year-on-year.

We will also see the FOMC meeting minutes which, after Bernanke's testimonies should not give much more away, other than the views of some of the more hawkish Fed presidents.

The EuroZone sees the HICP inflation indicator this morning and is expected to remain at 4% again down to commodity, energy and food prices rising. The medium term goal for the ECB is to keep inflation at or below 2% so could we see another rate hike next month, or is growth going to be the overriding factor here?

At home today not too much data, we have the Unemployment figures expected to be up slightly around 10,000 extra claimants. Gordon Brown is meeting with the Nigerian President today regarding their oil crisis. Another interesting article in the Telegraph today indicating a 40% chance of a 0.25% rate cut at the beginning of next month.

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King warns against silly over-reaction

During his testimony to the Treasury Select Committee on Thursday, the Bank of England's Governor Mervyn King guranteed that the MPC will not "€œoverreact" to rising inflation, arguing that there is a chance that slowing growth will bring inflation back under the target of 2%.

The somewhat dovish comments continued with King stating that an attempt to bring rising inflation under control too quickly would, “lead to a deep recession and that would be silly."

The Governor compared the growing problems in the UK housing market with the inflationary pressures caused by soaring oil prices to emphasise the conundrum currently facing the BOE.

The parliamentary hearing also revealed that the majority of MPC members did consider a rate hike at their June meeting, as mixed messages emerged regarding what the future direction of rates could be.

Although markets still expect the Bank to keep rates on hold in July, the hawkish comments of some MPC members including Kate Barker and Tim Besley regarding the possible negative impacts of inflation on the UK economy, confirmed that a hike was on the agenda in the short to medium term.

Over in the US, the dollar weakened significantly against both the pound and the euro in the aftermath of the Fed's decision on Wednesday to leave rates on hold at 2%.

Mirroring their counterparts in the BOE, US policy makers appear keen to maintain a degree of flexibility in their decisions depending on how resilient the economy proves to be.

Data released by the Commerce Department on Thursday reported that the US economy expanded at an annual rate of 1% during the first quarter of 2008, above the 0.9% estimate and the 0.6% growth recorded in Q4 2007. The dollar finished the day down 0.6% against the pound.

Sterling dipped against the euro as traders increased the chances that the ECB will raise rates to 4.25% in July. Although President Trichet again reiterated that the market would be bullish to expect a series of hikes, he said that rising inflation in the eurozone did mean a “small increase in interest rates was possible".

On Wall Street the S&P 500 slipped almost 3% as fears over further downgrades and writedowns resulted in a sell-off leaving the Dow Jones at its lowest level since September 2006.

In London the recovery in the banking sector proved to be short lived and dragged the FTSE-100 2.6% lower at 5,518. The weakening dollar combined with news from Libya that it may cut production pushed oil above $140 a barrel for the first time yesterday with ICE August Brent closing at $139.83. Opec's president also warned that prices could reach $150 - $170 over the summer.

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FED leave mortgage coalculator home loans rates Unchanged as expected

As predicted the Federal Reserve left the bench mark interest rate unchanged at 2%, ending the fastest series of rate reductions in two decades.

Although downside risks to growth remain, it appears that increasing inflation is becoming a greater concern. It has been said that this is a ‘baby step' in the direction of raising rates, as the FOMC leave their options open.

ECB President Trichet's comments during yesterday's press conference have cemented expectations that a 25bps rate rise in July is almost certain, with investors not ruling out the possibility of two rate increases this year, as inflation pressures have intensified in recent months.

Trichet told the European Parliament "€˜he did not envisage a series of increases, that being said, we never pre-commit. I said that we could increase rates by a small amount in order to secure a solid anchoring of inflation expectations'.

On the back of Trichet's comments we saw the Euro strengthen against the Dollar and the pound.

Oil dipped below $134 a barrel on Wednesday after reports showed that US Inventories had unexpectedly increased to 301.8m barrels in the week ended 20 Jun, against a forecasted decline of 1.1m barrels.

A report released by the US Energy Department yesterday has indicated that oil prices will decline to $70 a barrel by 2015 as new production begins in Azerbaijan, Canada, Brazil and Kazakhastan, however, it is predicted that this will be short lived as the price of oil will rise again to $113 a barrel by 2030 as the market remains relatively tight.

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OPEC to boost Oil output but little impact on prices

A summit held in Jeddah over the weekend which included representatives from all the major oil producing and consuming nations resulted in somewhat of a stalemate, as few of those on the supply side agreed that action was required by producers in order to curb the rising cost of oil.

Although blaming speculators for record prices, Saudi Arabia as head of OPEC has though agreed to increase production by 200,000 barrels per day by the end of July.

Saudi King Abdullah bin Abdul-Aziz stated that he was concerned about the global economic instability caused by higher prices and reaffirmed that, "€œWe declare our readiness to meet any additional needs."

Doubts that the summit will have any significant short-term impact on prices due to the continuing attacks on infrastructure in Nigeria and growing tensions between oil companies and the Kremlin were confirmed this morning as crude remained above $136.

The weekend has also emphasised the widening rift amongst OPEC's members over how the cartel should react to the demands of consuming nations to increase supply.

Several members including Algeria and Qatar have argued against increasing supply because speculators will drive up the price of oil whatever the production levels, whilst only Kuwait has publicly declared it is willing to follow Saudi Arabia's route if required.

Gordon Brown announced during his speech to the summit that Britain's energy industry would be opened up to encourage investment from oil producing nations in order to advance alternative energy sources.

Last Friday's EU meeting in Brussels also witnessed disagreement amongst leaders on a number of issues including the Irish rejection of the Lisbon Treaty and the possible future enlargement of the bloc.

President Sarkozy expressed his belief that the EU could not be expanded to include countries such as Croatia without the treaty being in place. This view was supported by a number of leaders including Angela Merkel, however others such as Silvio Berlusconi argued that enlargement should take place sooner rather than later.

In the markets, Friday capped a miserable week for the FTSE 100 as it ended the week down 88 points at 5620. On Wall Street the Dow fared little better slipping 1.9% by close of trading on the back of growing concerns over possible further downgrades in the financial sector.

In the currency markets Sterling fell against the euro as traders became less confident in a UK rate change and ended the week down 2% at 1.26. Preceding this week's Fed announcement on interest rates the dollar posted its biggest weekly decrease (3%) against the euro as EURUSD finished at 1.56, whilst cable closed at 1.97.

There are a number of important reports due for release this week including today's German IFO business survey, which will be closely scrutinised after last week's ZEW index reported that investor confidence had fallen to its lowest level for almost 16 years.

Tuesday will see the release of data in the US on consumer confidence before Wednesday's Fed announcement on interest rates. The market is predicting that rates will be kept on hold at 2% on the back of gloomy data still emanating from the housing market.

In relation to the UK, the CBI's Distributive Trades Survey will be released on Wednesday and will be significant as it is acknowledged that both the BOE and UK government place greater weight on the report as an indicator of short-term trends in the retail sector than last week's consumer index.

The week ends with the release by the Office of National Statistics of the finalised UK GDP figures for the first quarter of 2008

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Oil reaches another record high day before CPI released

Inflation in the Eurozone during May was 3.7% according to figures released by the EU's official statistical office yesterday, up from 3.3% in April.

These levels of inflation have not been witnessed since the Eurozone was created in January 1999 and will add weight to the calls for a rate increase by the ECB as early as next month.

Soaring commodity prices combined with mounting wage pressures are creating a situation in which it looks increasingly likely that the ECB will place the combating of inflation above the need to maintain economic growth.

Despite an announcement by Saudi Arabia that it plans to boost oil production to its highest level in 25 years, oil prices jumped on Monday to a fresh record high of $140 a barrel whilst the dollar fell against sterling and the euro.

EURUSD was driven up through 1.54 and then 1.55 overnight with cable also pushed higher but was unable to beat the 1.97 upside barrier.

This continued rise in the price of oil was clearly one of the main topics of discussion at last weekend's G8 summit.

Despite the split between the finance ministers as to the cause of the record prices, all were in agreement that the inflationary effect of rising commodity prices were making the job of policy makers a lot more complicated.

Hank Paulson, the US Treasury secretary attempted to again talk up the dollar and argued that the high oil price, "€œbrings the risk that the slowdown in our economy is going to be prolonged." As mentioned yesterday, the markets are predicting an increase of 75 basis points in rates by year end, however the Fed yesterday warned that although there is a good chance rates will be increased, the markets may have got carried away as to how many hikes there will be.

Inflation will remain at the top of the agenda today with the release at 9:30am of the CPI index in the UK. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%.

The pressure is very much on the BOE to prove it can still maintain some level of control over inflation despite what is happening in the commodity markets. The sentiment in the market is that we are reaching a point where the BOE must decide whether to sacrifice economic growth in order to prevent inflation becoming a runaway train.

However with the UK economy predicted to grow just 1.3% next year, King's words will be closely scrutinised by both the market and consumers.

Equities in both London and New York were down on Monday as the further surge in oil prices dented confidence. The FTSE ended the day down 0.14% on the first day of trading following the Chancellor's announcement that new rules were needed to ensure the ‘short selling' of shares was properly regulated.

Wall Street stocks dipped into the red as oil dependent companies and airline stocks took a hit dragging the Dow Jones down 0.3%.

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Inflation Remains Top of Central Banks Agenda.

On Friday morning it was announced that inflation in Germany has accelerated more than initially reported back in May, caused mainly by the price of oil.

The Federal Statistics Office reported that consumer prices increased by 3.1% year-on-year, a 10 basis point increase from an estimate made on May 28th. This could offer further support for the ECB to raise rates sooner rather than later. Later on Friday afternoon the trend of higher inflation continued over in the US.

It was reported that the consumer price index had increased by 0.6% during May, which is the biggest monthly increase since November.

Prices climbed 4.2% in May year-on-year, leading many investors to believe that the Fed will start to raise rates as soon as August. The markets have now priced a total increase of 75 basis points by year end.

Both the ECB and BOE are clearly focused on controlling inflation caused by higher commodity prices. In a somewhat unusual move the bank released the transcript of a speech made by the Executive Director Paul Tucker back on April 28th in which he indicated that policy makers must weigh up the significant inflationary risks from the commodity-price shock against the need to ‘mop-up' after the credit crisis.

In relation to rate expectations in the Euro zone, ECB board member Jose Gonzalez-Paramo added an element of doubt by commenting that, "€œThere is a possibility, not certainty, of a rate increase at our next meeting."

The announcement late last Friday afternoon that 53.4% of voters had voted against the Lisbon treaty will have significant ramifications throughout Europe.

At a two-day summit starting in Brussels this coming Thursday the EU's leaders will seek to outline a plan aimed at averting a full-on crisis, but many including the Irish PM have expressed a belief that on this occasion there is no quick fix.

The Irish vote against the Lisbon treat and slightly less hawkish comments from Gonzalez were the main forces behind the Euro's move lower on Friday. The single currency continued to weaken against the dollar as it traded down to test the 1.53 level but was unable to break below.

This also dragged GBPUSD down to briefly threaten 1.94. The weaker Euro allowed sterling to push back with EURGBP trading through 0.79.

Tuesday will see the release of the UK's Consumer Price Index. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%.

The minutes from the Bank's meeting earlier this month will be released on Wednesday at 9:30 am. These will be closely scrutinised by market participants for in indication as to the future path of UK interest rates.

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ECB comments dampen the euro

This morning the Euro has weakened against the dollar on the back of ECB comments yesterday that multiple interest rate hikes are unlikely.

In addition, InBev of Belgium's pending acquisition of Anheuser-Busch for $47bn may lend additional support for the dollar as the market anticipates InBev's USD requirement.

In the US, the Fed's beige book survey of data and information reaffirmed the weakening economic conditions stemming from softness in consumer spending, higher food and energy prices.

Corn prices have been on a run, continuing yesterday and giving support for other agricultural commodities. Oil prices continue to rise, moving up more than $5 a barrel yesterday. Globally, stock markets closed lower with the FTSE 100 index falling for its fourth consecutive day of losses.

As the market reassesses the interest rate structure for the euro, sterling has gained a bit of ground. In the UK however, economic data is dire with an increase in unemployment and the trade deficit and average earnings down fueling opinion that recession in the UK is very real possibility.

Economic data to watch for today is US retail sales figures out at 1.30pm and this afternoon Bernanke is speaking again. Tomorrow the G8 finance ministers are meeting in Osaka to reportedly discuss the rise of oil and food prices impact on the global economy.

Last of the most important announcements are the inflation numbers from the US on Friday afternoon. High readings will further support expectations for interest rate hikes from the Fed going forward.

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Oil price continues to strengthen

Global equity markets succumbed to a new sell-off at the end of last week amid jitters among investors over key economic releases and further oil price rises.

The US Labour Department on Friday reported a 0.5% increase in the unemployed American workforce (non Farm payroll) for last month, equating to 49,000 people losing their jobs.

This increase in the unemployment level was last seen in February 1986 and a level last encountered in October 2004.

Morgan Stanley (MS) issued a statement forecasting oil prices to breach the $150/barrel mark by July 4, this sent light sweet oil prices to $139 at the end of last week.

MS believe investors will continue to buy oil to hedge themselves against the foreseeable depreciation of the US dollar. The question is, how much this hedging is pushing the market against speculators pushing this oil price higher?

Closer to home the Bank of England is set to name its chief economist Charles Bean as deputy governor after a long standing dispute between the BOE and the Treasury.

This appears to be good news for Mr King as Mr Bean is his preferred choice of the two candidates.

In Europe it is well known that European central bankers have tended to follow the US Federal Reserve actions. However, comments made by Jean-Claude Trichet, ECB president indicated a misalignment in their interests.

Trichet signalled the ECB’s intentions to take a hawkish stance, by last week stating it was preparing to raise interest rates by 0.25% in July to curb the ever growing inflationary pressures within the Eurozone.

Trichet'€™s statement was soon followed by a 1.3% appreciation in the euro to 1.5749 US Dollars.

Sticking with currencies Sterling fell against the euro this morning which is the fourth consecutive day, dropping to £0.8014/euro. Against the dollar, it dropped to $1.9685, from $1.9708.

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Wise Money asks if an ECB rate cut is wishful thinking

Prominent fears of stagflation (inflation and stagnation) appeared to contribute to the Sterling weakness against the US Dollar yesterday.

Not helping the GB Pound was the release of a Hometrack survey showing a fall in house prices in England and Wales for the eighth month running and a 40% year-on-year drop in April's mortgage approvals.

Across the pond the US Dollar experienced a lift following a report showing stronger than expected US new home sales data and a retreat in oil prices. This phase did not last long however as the EUR took the lead once again.

The US Dollar fell compared to the Yen and CHF following the FBI saying that a video will be posted soon urging Islamic militants to attack the West via biological, chemical and nuclear weapons.

Oil is the key at the moment for the greenback as they seem to move inversely in recent times. If we see a fall in oil prices inflation worries will quieten down and make investors believe the worst is over.

Recent data released in Europe gave reason for concern over the health and stability of its economy. The EUR suffered following a slump in French business confidence to a 2.5 year low and an unforeseen decrease in Germany's consumer morale for the month of June.

Investors are looking for action from the ECB and a change from its neutral perspective to dovish. However ECB members themselves declare this as "wishful thinking" and a different approach to its monetary policy is yet to be seen. Looking at the global economy market participants feel that the US has seen the worst of it and that Europe is only at the start of its economic slowdown.

The FED has adopted a very dovish tone since fears of a recession first appeared and tried to counter-act with rate cuts totalling 3.25 percentage points since September however with inflation now beginning to be the main focus the market will be looking for the Fed's next move to be an increase in rates.

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Minutes and Oil highlight Fed dilemma

Congratulations to Manchester United and commiserations to Chelsea after a superb European Cup Final in Moscow last night as the Reds invade Red Square.

Another 'close call' at the Federal Reserve who released the minutes of their April 30th meeting yesterday.

Their task in controlling the US economy is not an enviable one. The decision to cut rates at that meeting was certainly not unanimous with members highlighting ongoing inflationary concerns.

Yesterday's latest surge in oil prices hardly helps their cause. Oil surged past the $133 mark fuelled by fears of a global shortage. Policymakers at the Fed are going to find it increasingly hard to weigh up the dual mandate of controlling inflation by hiking interest rates and encouraging spending and growth by cutting them. The minutes showed that the Fed's easing bias is drawing to a close with a more neutral stance to come.

The Bank of England's Money Policy Committee faces the same dilemma. The minutes of this month's meeting showed the 9-strong team voting 8-1 in favour of keeping rates on hold. Blanchflower was the predictable dissenter voting for a cut.

They also showed that there was a general reluctance to cut rates at the moment so as not to be seen specifically targeting growth which could in turn have spooked the market about future implications for inflation.

Many analysts are now targeting November for the next rate cut.

Expect sentiment on this to shift as economic data drips through in the coming months.

The Euro was the winner on the currency markets again which was not only benefiting from uncertainty surrounding future Dollar and Sterling yields but had independent support from the IFO Institute's business climate index which rose to 103.5 in May from 102.4 in April.

The survey signalled that the German economy was showing strong resilience to the US slowdown. The single currency hit one-month highs against Sterling and the Dollar.

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US Dollar falls against euros

The dollar fell to $1.5678 yesterday, the most in a month against the Euro as the price of oil rose above $129 for the first time and speculation increased that the European Central Bank will keep interest rates high.

The rise in the Euro was in spite of a weaker than expected ZEW economic expectation figure out of Germany. Economists expected a gain to minus 37 from minus 40.7 in April; however the gauge declined to minus 41.6.

The Euro is also being buoyed by the continued hawkish nature of the European Central Bank and gained after the head of the ZEW centre and adviser to the German government Wolfgang Franz said "European policy makers may raise interest rates as soon as the financial crisis ends".

Wolfgang, one of the five advisers to the German government told reporters "I would recommend that the ECB keep rates constant until there is clear evidence the financial crisis is over, then the ECB might need to raise rates to take care of inflation". Euro focus today will be on the IFO release for Germany.

Most attention today will be focused on the minutes from the FOMC and BoE. There is market speculation that the minutes from the April 30th FOMC meeting will suggest that the Fed is finished with its most aggressive easing campaign in decades after the 25bps cut down to 2.00%.

However there is still thought to be a considerable difference of opinion between policy makers and the minutes are eagerly anticipated as they ought to provide some sense of whether most members are more worried about the outlook for growth rather than inflation.

Minutes from the BoE meeting on May 8th are released today at 9.30. After late speculation that the bank would opt for another cut after a string of weak data released prior to the meeting, rates were left on hold at 5.00%.
The main focus today will be on the voting split between the members and the discussions that led to the unchanged decision. This should provide an indication of sentiment for the future and what we can expect in the short term.

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Central Banks Keep Rates on Hold .. Oil surges to new record high

Yesterday we saw the MPC decide to keep UK rates at 5% for a further month. Until we get the minutes of the meeting released on the 21st May, we will not know how close a decision this was.

With the current raft of weak data coming from the UK I would imagine there was quite a battle of words between the inflation focused hawks and the doves concerned with sputtering growth.

The ECB also left rates unchanged with their reference rate held at 4% for the 11th month in a row.

The statement from ECB President John Claude Trichet, that immediately followed the meeting left the market in no doubt that the Central Bank's main concern was still very much the fight to stave off inflation.

It looks very unlikely that we will see a move in Euro rates now until well into the second half of the year even though the economic signals from the majority of the member states are getting weaker by the day. German export numbers yesterday underlined this with the strong Euro damaging business outside the region whilst weak demand from within the Eurozone accentuated the problem.

The resultant FX reaction was muted although by the end of the day Sterling did weaken against both USD and Euro.

The outlook on currencies remains clouded with the Market currently making money by being long of Dollars but still unsure that both the US economy is out of the woods and that the US are supportive of a further strengthening in their currency.

Commodities, and especially oil, were the dominant movers yet again with the price of crude going above the $124 per barrel for the first time ever - suddenly, the prediction from Goldman Sachs that oil will reach $200 per barrel this year doesn't look too off the wall.

The resulting economic Global slowdown if this occurs would be severe in the extreme. On the other side, base metals fell in active trading.

Today we are light on the data front with just the US Trade Figures at 1.30 to look forward to. Given the fine weather, this might not prove a strong enough draw to keep the market bubbling into the afternoon.

Next week looks more interesting with the highlight in the UK being the release of the Bank of England's Quarterly Inflation report. The data plus the question and answer session that follows will set the stage for the MPC meeting in June and as such should provide a good clue as to which way the committee will swing.

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Euro Inflation takes to the stage

Euro zone inflation took centre stage yesterday as Jean-Claude Trichet spoke at a conference in Vienna. The European Central Bank President made it clear that the governing council must use interest rates to deliver price stability.

Any other considerations, such as growth and employment are secondary. These comments effectively dismiss the recent calls from French and Italian government officials for growth to be taken into account.

Inflation which reached 3.6% last month, the fastest pace in 16 years, has led to the ECB leaving rates unchanged. It appears this may be the same reason for the repo rate remaining at 4% in the near future. In the same speech, Trichet again voiced his concern about the euro's strength and the impact it has on European exports.

The euro bounced back against the dollar during yesterday's trading, after three days of declines. Yet another occasion on which Trichet talks tough on inflation, also mentions the detrimental effects of a stronger euro and the market automatically pushes the single currency higher.

There was additional evidence, provided by the Hometrack Ltd survey, that the UK housing market is correcting. The results which were released early yesterday showed the average price of a home declined a further 0.6% in April. This is the biggest month on month drop in over three years for this report.

Oil prices climbed again to reach a record $119.93 a barrel, caused by a strike at a refinery in Scotland and further violence in Nigeria.

Possibly of greater interest is that the EUR/ USD cross rates has had a correlation of 0.96 with the price of oil. Just a bit closer and it's a perfect hedge.

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Oil hits new highs as dollar sinks

Oil carried on its upward trend yesterday almost hitting $120 a barrel supported by supply concerns largely driven by rising demand from China.

In addition, sentiment may have shifted and ignited a rethink towards the backing for biofuels in the US and Europe as rising food prises may mean this solution to the oil supply issue may no longer be commercially viable.

Rice jumped to a record high as World Bank officials stated they were concerned with the mounting pressure in Thailand to restrict shipments. Thailand is the world's largest exporter of rice and these comments help add fuel to the worsening global food crisis.

The dollar sank to lifetime lows against the Euro breaking through the significant $1.60 level as hawkish comments from the ECB supported the eurozone currency.

According to traders yesterday, strong demand for the Euro came from Asian sovereign institutions. Also ECB council member Yves Mersch made comments that the central bank may well have to revise up its inflation figure on the back of the recent surge in oil and food prices which pushed inflation to a 16 year high of 3.6% in March for the eurozone.

This has caused certain economists to rethink their rate cut stance with a view there may actually be rate increases ahead.

The Euro lost ground against the pound as Tim Beasley a member of the Bank Of England's (BOE) MPC commented on the recent action to ease liquidity problems in the UK financial system would allow it to focus on controlling inflation.

This also saw the pound rise 0.8% to 1.9955 against the greenback and gained 0.6% to Y205.66 against the Yen.

Elsewhere Bank of Canada (BOC) cut interest rates by 50 basis points to 3 per cent with the Canadian dollar falling 0.5% to C$1.0070.

Although the cut was expected the BOC made changes to their statement stating the expected US slowdown was likely to affect Canadian exports and prompt further rate cuts.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England is the focus of Wise Money this week

The lack of Interbank lending is weighing heavily on the price of real money in the market place, as we continue to see disparity between LIBOR rates and BASE rates, with the benchmark 3 month LIBOR fixing at 5.89pct on Friday (against 5.00pct BASE).

The question is how long will this continue and what will the powers that be implement to attempt to bring levels back towards parity? In the current climate investors have the ability to lock in to favourable deposit rates, see levels above.

In home news - The Bank of England is due to announce plans to stimulate lending between banks by effectively taking the under performing assets which are linked to residential mortgages from their balance sheet and swapping them for Gilt edged securities which are effectively backed by the labour Government.

These transactions could carry a haircut of around 20%. There are many associated risks - This will take time to filter through the system and the restoration of confidence will not be immediate, lenders may chose not to pass on reductions in Base rates to home owners while the price of liquidity remains inflated.

Oil prices continue to rise, with record levels posted last week at $117 a barrel. OPEC announced that strengthening demand coupled with the weak US Dollar were pushing prices up. Many now expect oil to go through $120 by the summer.

The stock markets posted small gains last week with the FTSE 100 ending the week up over 200 points higher at 6,056.5

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Pound weakens as inflation data weaker than expected

The Pound touched its weakest level in more than a month yesterday against the dollar and euro following a report showing that UK inflation slowed, making it less likely that the Bank of England will increase interest rates. The central bank will release new forecasts for inflation and growth this morning.

The euro gained yesterday, following strong data showing growth in the eurozone and positive data in a survey of German business conditions. Eurozone gross domestic product expanded 0.9 per cent in the fourth quarter, moving the annual rate to 3.3 per cent.

In Germany the ZEW investor confidence survey pointed to a pick-up in the economy later in the year once the impact of value added tax in January starts to wear off.

U.S. retail sales are released today and they are expected to have risen for a third successive month in January as Americans redeemed holiday gift cards and took advantage of lower fuel prices. Sales are forecast to have increased by 0.3 per cent in January after a 0.9 per cent in the previous month.

The figures may show that the economy is growing at a moderate pace, a description Fed chairman Ben Bernanke is likely to share when he begins his testimony and Fed policy report later on today.

The Australian dollar jumped in early trading this morning following a rise in US trade deficit and strong European economic growth worked in the currencies favour.

Gold firmed early this morning but hovered below a seven-month high hit yesterday above $668 an ounce, as traders turned to currencies for direction ahead of direction ahead of Fed Chairman Ben Bernanke’s congressional testimony.

Oil prices eased this morning as traders focused on the approaching end of winter ahead of U.S. inventory data, and took profits from gains driven by the International Energy Agency’s forecast for higher 2007 demand.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling ends losing streak on strong house prices

The Pound advanced against the euro yesterday on expectations that an inflation report released today will show consumer price in the U.K. held near the highest in 10 years last month.

The U.K. currency cancelled out a three-day losing run against the euro following strong data released in the UK yesterday morning, most notable of all was the fact that house price inflation touched a 21-month high in December.

German economic growth was much stronger than expected in the second half of last year, prompting the nation’s federal statistic to revise up its growth estimates. Real gross domestic product grew by a quarterly rate of 0.9% in the last three months of the year, data published early this morning showed.

Finance ministers and central bankers from the group of seven nations urged investors to recognize Japan’s economic recovery could possibly be stronger than they think, warning not to make “one way bets” against the currency.

Japan’s currency slumped to a record low against the euro, increasing concerns among Europe that their exports would become less competitive.

Oil hovered below $58 a barrel early this morning, following yesterdays $2 slide on signs the OPEC will keep output stable when it meets next month. Several OPEC ministers have said there will be no need for output cuts to add to pledged reductions of 1.7 million barrels per day, with Saudi Arabia’s oil minister Ali al-Naimi saying the marker was in better balance.

Gold steadied early this morning following sharp declines yesterday as the dollar lost some of its clout against other currencies. Gold held just above the widely marked technical support level of $660 an ounce, countering some expectations that geopolitical issues may drive the bullion closer to $700.

investors this week have initially been seen putting more money into gold as tensions were seen increasing in the middle east after European Union foreign ministers agreed on sanctions on Iran to raise pressures over its nuclear programme.

The Australian dollar opened weaker today driven by the likelihood that interest rates will stay on hold this year. It is thought that a combination of the Reserve Bank of Australia’s (RBA) softer inflation outlook and US dollar strength against the yen worked against the yen worked against the Australian dollar in overnight sessions.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.