Wise Money sees no surprises on Thursday.

Following the much hyped 25bps rate increase from the ECB yesterday, it seems Monsieur Trichet may have disappointed Euro bulls in the statement that followed.

With his moderate tones, he commented on the risk of further upside inflationary pressures but at the same time he remains concerned about growth, this along with his "no bias" sentiment put the euro immediately under pressure, not helped by a stronger US Dollar.

With perfect timing the Fed released the often volatile Non-farm payrolls at exactly 1:30pm. The jobs number for the month of June was bad but not bad enough to stifle the gains in the US dollar. Non-farm payrolls fell by 62k, the sixth consecutive decline in a row.

The April number was revised down from -49k to -62k while the unemployment rate remained at 5.5%, matching the highest level since October 2004.

Anything short of 100k had been viewed as being dollar positive and that is exactly how the market reacted. The biggest contributors were healthcare, education, leisure and government. The biggest losers were in goods producing and business services.

Elsewhere UK PMI services reported further contraction last month. Britain's dominant services sector shrank in June at its sharpest rate since the aftermath of the 9/11 attacks on the United States, a survey showed on Thursday, in a sign the economic slowdown is gaining traction.

However, signs from the CIPS services survey that companies are managing to ramp up their prices to partly offset record high cost inflation are likely to reinforce the view that the Bank of England is unlikely to cut interest rates any time soon.

The Bank's quarterly credit survey, also published on Thursday, showed the credit squeeze for households and businesses looked set to intensify over coming months as lenders braced for defaults amid a deteriorating economic outlook.

Today being a New York holiday should prove to be relatively quiet and there is a severe lack of data due for release.

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Wise Money eyes turn to euro debt consolidation rates

With a raft of data and announcements due out today and the shortened week for the US, today could prove rather volatile.

It has now been officially confirmed that the Dow Jones Industrial average sank into a bear market on Wednesday, closing more than 20 percent below its October peak, while the benchmark S&P 500 teetered on the brink of bear market territory.

In overnight trading we have seen Oil hit further highs. Jumping about a dollar, London Brent crude rose as much as $1.49 to a record of $145.75 a barrel and U.S. crude rose as much as a $1.00 to an all time high of $144.57, before easing back to $144.19.

The dollar also fell sharply against the Euro overnight, after a report the previous day showed U.S. private employers cut the most jobs in nearly six years and also on the back of weakening stock markets.

In contrast the euro was well supported ahead of today's rate decision with the BIS being a notable seller of Euro at 1.5840 for most of the morning.

At 10:00 we have EMU retail sales. After three consecutive falls, markets are looking for a slight increase for the month-on-month figure.

Then come lunchtime when we have the 2 big events of the week. At 12:45 we have the ECB rate announcement.

As stated previously the euro is finding good support ahead of the decision, with a large consensus of market believing that a hike of 25bps is a done deal. The statement that follows (13:30) will be closely scrutinised, as the ECB has tried to tone down the significance of key expressions of late and a moderate tone is expected.

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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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Euro rallies on ECB rate rise hint

ECB President Trichet statements dominated the market yesterday after delivering surprisingly hawkish comments following a widely expected unchanged rate decision- leaving its key lending rate unchanged at 4%.

He indicated that some ECB officials argued for rate hike later this year, and that the central bank is in a state of "heightened alertness" over inflation. This caused the euro to strike back on foreign exchange markets on Thursday, bringing a speedy end to the US dollar's Bernanke-inspired rally while also advancing strongly against sterling.

This straight talking about the exchange of opinions by the ECB board members leading up to the rate decision suggest that there is an increased possibility of a rate hike in July/August.

On the back of a weaker dollar yesterday, Crude oil closed up $5.49 on the day.

The Bank of England also left rates unchanged at 5% on Thursday and is expected to remain on hold for some time as the country faces the combined effects of slowing economic growth and soaring inflation.

However, while most economists agree that near term inflation expectations will probably keep the BOE from cutting rates in the near term, expectations of a further deterioration in economic conditions is likely to bring rate cuts back on the table by year-end. Time will tell.

The US non-farm payrolls report is out today, this is one of the most critical releases for the US dollar, not only because it is market-moving, but also because it can help us gauge the broad status of the economy.

Currently, the consensus estimates are for a drop of 60K, which would mark the fifth consecutive month of job losses. Regardless of how payrolls fare, the news is likely to spark significant volatility.

The National Bureau of Economic Research believes that over the past 3 decades, the US economy has gone through 3 recessions. In each of those 3 recessions, there was a string of job losses that lasted for a minimum of 10 months.

So far, non-farm payrolls have fallen negative for the past 4 months, and the May report is anticipated to bring this tally up to 5.

Some argue that the current downturn in growth could be more severe than the recession in the early 2000s due to the triple blow of a housing crisis, credit crunch and skyrocketing commodity prices.

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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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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.

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Rally for Sterling

Yesterday saw the US Dollar and British Pound rally back against the Euro.

Figures showed a surprise drop in German retail sales, falling by 1.6% in February, market expectation was for a 0.5% rise, making this the lowest drop in a year.

This led many traders to cash in on their positions which have seen the Euro hit historic highs against both the USD and GBP. Whether this represents a long term pattern is debatable, particularly with this month likely to see both the Fed Funds rate and the UK base rate cut.

The USD gains were supported by better that expected US manufacturing numbers from the Institute for Supply Management. This data should be taken with a pinch of salt as new reporting methods gloss over a sharp drop in the new orders component, which had the lowest drop since Oct 2001.

The markets main focus will be on Bernanke's testimony today at 14.30 BST. They will be looking for indications as to the likely size of the Fed Funds cut on the 30th April. Sentiment seems to point to 50bpts cut, however a bullish testimony from Bernanke may change this.

Across the globe we saw the Reserve Bank of Australia signal the end of their rate raising cycle by keeping interest rates on hold at a 12 year high of 7.25%. The AUD dropped 0.8% against the USD.

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Will Bernanke Provide the Answers?

The Euro continued its rally at the end of last week, hitting all time highs against GB Pound and the US Dollar.

Data released last week, particularly German and French business confidence, proved to be better that expected. This view added support to the ECB's decision not to follow the US and the UK by cutting rates.

The inflationary pressures in the Eurozone remain the focus of the ECB. Expect the Euro to keep hold of those gains this week with today's inflation data expected to add credence to their policy.

As last week drew to a close the outlook for GBP became increasingly dovish, with the likelihood of an April rate cut gaining momentum. The BoE has further signalled its intention to ease liquidity pressures in the market, particularly with 3 Month LIBOR still over 6%.

Bernanke's Testimony to congress will be the crucial indicator for the week. The market expects some difficult questions for Bernanke to answer, namely is the US in a recession and what is being done about it?

The obvious tool at the Fed's disposal is cutting the Fed Funds rate. Sentiment favours a 50bpts cut on the 30th April at the next FOMC meeting. It has been mooted that measures to nationalise bad mortgage debt will be announced.

Although a radical step, it is aimed at shoring up already weak confidence in the economy and on Wall Street. Friday's Non-farm pay rolls is expected to provide further evidence of a US recession.

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.

Dollar bounce on profit taking

The dollar continued to gain lost ground on the euro as falls in equity markets prompted investors to act decidedly to cut down on risky positions.

The dollar benefited from safe haven type flows what with Wall Street opening lower, further denting sentiment after major European and Asian bourses all ended down amid concerns about the impact of the sub-prime crisis on the US and global economy.

While concerns about the US economy also weighs on the dollar, no part of the global economy is expected to escape unscathed, in turn leading to widespread risk aversion.

The current market sell-off is especially more dire than the turmoil of February and August because of escalating probabilities of a US recession.

The yen has also been supported by increased investor caution, as market players shy away from the risky carry trade where they sell the low-yielding Japanese currency to invest in higher-yielding ones elsewhere. This in turn has pushed high yielding currencies such as the pound and Australian dollar lower.

Equity market woe is helping to weigh on the high-yielding pound, the dollar and yen are perceived to be more as safe-haven currencies than the pound, so it can be vulnerable when stocks fall.

However while the rise in risk aversion has given the dollar a boost, analysts still expect the greenback to remain weak in the long-term, especially following the notable absence of any comment on the currency at this weekend's G7 meeting.

The communique from the G7 gathering in Washington made no mention of the weak dollar, or indeed the yen, opting instead to call again for a faster appreciation of the Chinese yuan.

The dollar's fortunes will now depend on whether the Federal Reserve continues to ease its monetary policy stance. Most of last week's US data came in on the soft side and analysts expect to see a similar outcome in the coming days.

Apart from safe haven flows, the dollar is unlikely to find support this week as the cyclical data should remain weak and the market is likely to revise the probability of a US recession upwards. While no major data is scheduled for today, existing and new home sales due out on Wednesday and Thursday respectively are expected to show the housing market continuing to falter.

Elsewhere, the Canadian dollar fell back from recent 31-year highs on another outbreak of risk aversion in global markets, and also in response to weekend commentary from Bank of Canada governor David Dodge expressing concern about the speed of the currency's appreciation.

US interest rates dip

The US dollar was mostly weaker against major currencies in early morning trade this morning, extending overnight losses after the minutes from the Federal Open Market Committee's meeting last month appeared to leave the door open to further interest rate cuts.

The Fed slashed interest rates by 50 basis points in September and another reduction will put further pressure on the US dollar as traders go looking elsewhere for higher-yielding currencies.

The Fed said that the US economy was likely to grow below its potential for a while and that inflation had moderated. This suggests that the Fed may need to cut interest rates further and the continued pricing of a 25 basis points cut by early 2008 weighed on the US dollar.

The euro traded as high as 1.4115 dollars overnight after European finance ministers indicated they were more concerned about pressuring China over the value of the yuan than in stemming the rise of the euro against the dollar.

China has been under increasing pressure from its major trading partners, including the US and European Union, to increase the value of the yuan because it gives Chinese exporters an unfair competitive advantage by making their products cheaper.

Meanwhile, the Australian dollar was higher across the board in overnight trading as weakness in the greenback, a growing appetite for risky assets and higher commodity prices supported the currency.

A strong housing finance report for August, to be released at 13.30 today, could see the Aussie punch through Monday's 23-year high of 90.33 US cents.

Finally, the British Retail Consortium said like-for-like sales, which exclude new stores and space, were up 3.0 % in the year to September. This was higher than the 1.4 % growth forecast and ahead of August's 1.8 %.

The BoE's next move is widely tipped to be a cut in interest rates, following five increases in the past year or so, but economists are divided on how soon to expect a move downwards.

Meanwhile, the euro was recovering slightly after losses on Tuesday. European monetary policymakers have been voicing concern about the euro's persistent strength, it is currently trading above 1.40 to the dollar, but a Eurogroup meeting on Tuesday night did not break new ground as the euro zone's finance ministers reiterated earlier concerns about "excessive volatility" in exchange rates.

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Euro strength worries currency conveters

The euro softened, particularly against the dollar, as euro area finance ministers met to discuss, among other topics, how to contain the strength of their common currency.

In the run-up to the Ecofin meeting, held yesterday and today, politicians have been vocal about the need to do something about the strength of the euro. Together, they will be drafting a policy stance to bring to the G7 meeting later this month, in an effort to make other currencies, the US dollar, most notably, to appreciate.

Euro zone finance ministers will be plotting a way to get the US to do more about the weak dollar. However, we believe this will come to nothing as long as the US remains intent upon having China stop intervening in foreign exchange markets. The most likely result, therefore, will only be more pressure on China.

The euro weakened yesterday after comments by Rodrigo de Rato, head of the International Monetary Fund, who said the dollar was undervalued. The currency also took a hit from weak data for German manufacturing orders.

These rose by a modest 1.2 % in August from July, below analysts' forecasts for a bigger 1.7 % increase to correct July's very disappointing 6.1 % decline. The figures echoed other indicators which show euro zone growth slowing down.

Elsewhere, the Pound remained rangebound against other major currencies after economic data yesterday morning showed input prices rose sharply for companies, although output prices remain subdued.

The figures failed to move markets much in anticipation of the Pre-Budget Report today. Markets are digesting the news that Prime Minister Gordon Stalinist Brown will not hold snap elections this autumn. The decision raises questions over what economic measures will be included in the Pre-Budget Report.

The US dollar recovered against the euro in afternoon trade in Asia today on growing speculation the Federal Reserve will refrain from cutting interest rates this month.

Rates maybe on hold until the end of this year as investors bet that September retail sales and other data coming out this week will support the view that the US economy won't plunge into a recession as earlier feared, right after the subprime mortage crisis erupted in August.

On Friday, investors cheered and gobbled up US stocks after an unexpectedly high jobs report for August and September. The US economy added 110,000 jobs in September, more than the 100,000 gain that most analysts have predicted. Revised figures for August also showed a gain of 89,000 jobs instead of an earlier estimated loss of 4,000.

The better-than-expected jobs data followed earlier reports that the manufacturing and services industries in the US continued their expansion last month. The dollar plunged to record lows against major currencies after the Fed's surprisingly deep 50 basis point rate cut on Sept 18.

The dollar fell to an all-time low of 1.4283 to the euro on Oct 1 as investors dumped dollar-denominated assets in favor of high-yielding currencies.

Finally, the Bank of Japan will meet this week and most analysts expect the policy makers to maintain its key rate at 0.5 %, the lowest among industrialised countries.

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Deposit Insurance for lenders?

The news making headlines overnight is the report in the Independent newspaper that the Financial Services Compensation Scheme has a war chest of £4.4bn for its deposit protection plan.

The GB Pound was heavily sold on almost all crosses on this revelation as the FSCS apparently had a fund worth £9bn which has reduced through payouts to depositors of collapsed credit unions. This is interesting news given that the government is considering depositor protection of up to £100’000.

German business confidence in September dropped to a 19 month low this morning as the strength of the Euro has caused caution on the part of companies in light of the current financing conditions.

The Euro saw highs in excess of 1.4100 yesterday and this is concerning given the state of the US economy and the reduced prospects for export growth.

The Bank of Japan August meeting minutes where released and provided comment on the nature of the decision not to raise rates. It showed that the swings in global financial markets were of concern.

They stated that they would adjust rates when the markets stabilise. As a result the JPY has strengthened against the US dollar.

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Currency converters look to the US for forex lead

The dollar strengthened a touch from its record lows against the euro after Federal Reserve official Richard Fisher said the Fed's rate cut last week prevented an excessive slowdown in economic growth.

Markets had been anticipating comments from Fisher and Fed chairman Ben Bernanke yesterday for clarification on the Fed's thinking when it cut rates by a half-point last week to 4.75 %. The central bank is trying to prevent a severe economic slowdown following the collapse of the US subprime lending market. Fisher said the Fed would have risked 'unacceptably slow economic growth' had it not cut interest rates last week.

He said that recent trends on inflation provide 'some wiggle room to adjust our course' on rates, and that if a further correction either toward growth or against inflation is needed, 'we will make it'.

Highlights of the US data released this week include today’s existing home sales and consumer confidence, Wednesday's durable goods orders, and Thursday's new home sales.

In terms of the dollar, though, other analysts believe the data will be weak enough to fuel speculation of further rate cuts, and consequently weaken the US currency.

The general tone of the US data this week is likely to compound expectations for further cuts in US interest rates, with market attention now settling on the possibility of a further quarter point-cut at the October Federal Open Market Committee meeting.

Meanwhile, further hints of Fed thinking will come as Bernanke speaks again on Thursday.

Things were quiet elsewhere on currency markets, although the euros continued strength is increasing speculation that European rate-setters may be forced to act to weaken the single currency.

The euro's rise to over 1.40 usd, it hit an all-time high of 1.4129 yesterday morning, is prompting cries of complaint from business and political leaders in Europe, who want some devaluation of the euro to help beleaguered exporters.

French President Nicolas Sarkozy is at the fore of this movement and recently described the euro at 1.40 usd as a 'problem' for euro zone economies. He also applauded the US Federal Reserve's half-point cut in interest rates last week.

The European Central Bank, which has independence over monetary policy, has refused to heed political pressure to cut interest rates as it is determined to keep inflation under control. Its benchmark interest rate is currently 4.00 %.

On the other hand, the BoE left its Bank rate on hold at 5.75 % this month since it said turmoil on financial markets, a consequence of the US subprime collapse, was clouding the economic outlook. Markets will be keen to see how much of the BoE's anti-inflationary leaning has survived the market turmoil and credit crunch.

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US markets remain the focus

The dollar was steady above 15-year lows against a basket of currencies, as investors squared up positions following the currency's sharp falls last week, in the wake of the US Federal Reserve's half point interest rate cut.

There are many market participants who think that the dollar's recent decline may have been overdone, especially as there are now growing signs that the economic slowdown in the US is beginning to be felt around the world.

That was most evident on Friday in the flash PMI estimates for the euro zone's manufacturing and services sectors. Both showed a sharp drop. The manufacturing PMI fell to 53.2, the lowest level since November 2005, while services fell to the weakest since August 2005 of 54.0, both below forecasts for a smaller drop.

Though the readings remain above the 50 level that marks expansion in the sector, they confirm that the euro zone economy is taking a hit from the recent turmoil on financial markets and will further decrease the likelihood of the European Central Bank raising interest rates any further.

Nevertheless, the market's main focus remains the US, and this week's event risk remains high for the US currency. The economic data flow picks up, albeit that the market's attention will still firmly rest on conditions in the credit markets, liquidity issues and the stronger euro.

Indeed, with the global focus still on US growth concerns, it remains difficult to expect the euro to soften over the week ahead even though the euro zone economic releases are likely to be on the soft side.

Earlier on Friday, the euro hit a new all-time high of just below 1.4120 against the dollar, contributing to the fall in the dollar index to a 15-year low of 78.398. Analysts said the inexorable rise in the euro may prompt some attempts by European policy-makers to talk down the value of the single currency.

Until August, the European Central Bank could afford to lean back and let the rising euro do some of the monetary tightening for the ECB, however, the turmoil in financial markets, the heightened uncertainty about the growth outlook and intense political pressure have changed the situation. The current surge in the euro to a new record high is a serious issue for the ECB.

Though ECB president Jean-Claude Trichet has stressed the bank's independence in all economic matters, complaints from politicians have already begun. Speaking on French television, French President Nicolas Sarkozy continued to criticise the ECB's rate tightening bias and called for increased consultation with politicians on monetary policy.

Elsewhere, the Canadian dollar broke parity against the US dollar, reversing earlier losses stemming from weak Canadian retail sales figures, as oil prices hit another fresh record high.

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Weak data undermines currency converters

The dollar came off day lows after a key indicator of US consumer confidence came in a touch above expectations, even though the gauge did indeed weaken.

The closely watched consumer confidence index released by the Conference Board fell to 105.0 in August from a downward revision to 111.9 in July. Wise Money had predicted a steeper plunge to 104.5. The recent turmoil in equity and credit markets was no doubt a big negative factor but, to some extent, it will have been offset by the recent declines in gasoline prices.

Yesterday, equities were shaky with key indices in Europe all down, alongside falls on Wall Street. Against this backdrop, currency markets are likely to see bouts of volatility as risk appetites ebb and flow.

Any dollar strength is likely to be inconsistent as long as US data remain weak. Unless we start seeing some very robust signals out of the US, perhaps suggestions that the population is willing to spend its way out of a recession, then further volatility will follow.

The latest dollar-hostile developments include Monday’s existing home sales figures for June, which showed inventories of unsold homes at a 16-year high, and a report in yesterday morning's Times that US bank State Street has 22 bln usd of exposure to debt conduits, the off-balance sheet vehicles that have contributed greatly to the uncertainty in financial markets.

Signs that there are more knock-on-effects to come from the credit crisis have previously helped the dollar as risk sentiment waned, but further bad economic news flow is now fuelling speculation the Federal Reserve will cut interest rates to prevent harm to the wider economy.

The yen has also been volatile, strengthening since Monday as risk appetite is dented by the bad news out of the US. Weakening risk sentiment supports the yen as it means investors refrain from the risky carry trade strategy of selling the low-yielding Japanese currency to invest in higher-yielding ones.

Meanwhile, the euro stayed well bid after a stronger-than-expected key German business survey and robust money supply figures for the 13-nation single currency area.

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Currency converter takes lead from the ECB

The euro firmed after the European Central Bank gave a clear hint that it is still on course to raise borrowing costs next month despite the recent turmoil in the financial markets.

In a statement, the ECB confirmed yesterday that its monetary policy stance has not changed from earlier in the month when the bank's chief Jean Claude Trichet reinforced expectations of another quarter point increase in the key refi rate to 4.25 %.

His use of the code words 'strong vigilance' on August 2 was widely seen as a precursor for a rate hike. Since then, however, the troubles in the US subprime market have led to steep falls in markets around the world, and in turn leading to some doubt whether the ECB will indeed continue hiking interest rates.

As this phrase has been used to signal every rate hike in the recent cycle, this supports our view that the ECB is likely to make good its promise for a September hike. Indeed, if growth rebounds in the coming months as the surveys suggest, another hike in December, to 4.50 % is still a possibility.

While the ECB is poised to raise interest rates, the US Federal Reserve could be on course for a rate cut.

The Fed's chairman Ben Bernanke said on Tuesday that he was 'absolutely' prepared to use all the tools at his disposal to address the credit crisis in the US financial system, according to Senator Chris Dodd, chairman of the Senate banking committee. Dodd reported Bernanke's comments to the press after a closed-door meeting with Bernanke and Treasury Secretary Henry Paulson.

Elsewhere, the pound was buoyed by a much stronger than expected survey on the UK manufacturing sector.

The Confederation of British Industry revealed that a balance of +9 % of firms polled reported that their order books were above normal in August - the highest level for more than 12 years.

An imminent rate hike from the Bank of England is not expected after last week's news that annual CPI inflation dropped below the 2.0 % target to 1.9 % in July from 2.4 % in June.

Still, a return to calmer conditions in financial markets in the near-term combined with a likely acceleration in CPI inflation in Q4, due to base effects from the large decline in oil prices late last year, could still see the BoE raise rates one final time to 6.00 % by year end.

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Sterling currency converts to 2 month euro low forex

Yesterday saw the British Pound hit a two month euro low dropping below 1.4800. The move was driven by technical model traders and hedge funds selling the GBP, pushing the GBP/EUR lower.

The GBP was also hit against the USD falling from 2.0460, in early trading, to just below at 2.0300 (more than 160 points on the day). The fall in the GBP/USD happened despite the ongoing concerns over sub-prime mortgages in the US.

The USD also strengthened against the EUR by the US afternoon. Despite gaining against the EUR and GBP yesterday the USD index hit a 15-year low dropping below the key 80-mark. The dollar index, an indication of the USD value against six major currencies, hit a level of 79.957 last seen in September 1992.

The market is awaiting today’s FOMC policy announcement expecting the base rate to be left unchanged at 5.25%. Great attention will be paid to the accompanying FOMC statement which is expected to acknowledge further decrease in the housing market due to the sub-prime disaster.

The reaction of US equities, treasuries and oil to the FOMC statement will be closely watched. The stock market acts as an indicator to measure risk appetite as investors compensate risky carry trades meaning borrowing in a low-yielding currency and investing in higher-yielding assets. If the wording of the Fed deviates significantly from the previous statements and more specifically if it hints at rate cuts there could be significant movement in the market.

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.

Euro strengthens on interest rate prospects

The single currency was the main winner on the exchanges during Monday’s session. The Euro rose to 1.3195 against the Greenback and recovered to 0.6835 against Sterling.

The Euro has underlying strength in current markets as prospects for interest rate hikes in the Eurozone are high and visible. The ECB raised rates to 3.75% at it’s meeting last week.

The yield advantage that the other majors, such as the Dollar and Sterling, hold over the Euro is quickly being eroded and the influential IFW Think-Tank yesterday raised German growth forecasts for the year from 2.1% to 2.8%. This led them to call for interest rates to be at 4.25% by September.

Whilst the direction of the monetary policy was no surprise to the market, the pace of potential future tightening as predicted by the IFW has aided the Euro’s appeal. To add to the certainty for investors on this subject, ECB Council member Klaus Liebscher said that Eurozone inflation is not yet under control and Jean-Claude Trichet echoed this sentiment at the G10 meeting in Switzerland.

The Euro has also avoided heavy losses in comparison to it’s competitors during the recent unwinding of carry trades (a major theme driving the markets at the beginning of the month). Repatriation of Japanese-owned capital as we approach financial year end could make the high-earners vulnerable once more.

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Euro bulls await German IFO Report

Sterling was stronger across the board as the central bank injected more uncertainty about the outlook for monetary policy. Just after the market sent the currency tumbling on the back of less hawkish MPC minutes from the latest monetary policy meeting, BoE’s Chief Economist Bean reminded everyone that the central bank cannot afford to relax about inflationary pressures.

GBP edged slightly higher against the Euro as data showed that UK business investment grew at its fastest pace in more than a decade in the fourth quarter. Today we are expecting the 2nd release of fourth quarter GDP, no changes are predicted which should leave the market’s focus on the German IFO report.

USD hit a one-week high against the Euro, gathering support from the minutes of the January policy meeting of the Federal Reserve, which showed the open market committee remained hawkish on inflation.

Yesterday in the US the jobless claims data was released, which dropped less than expected. This suggests that the labour market may not have been as healthy this month as it was back in January. There is no US data scheduled for release today but Fed Presidents Fisher and Yellen will both be speaking about the US economic outlook.

Eurozone data released yesterday indicated strength in exports but weakness in government and private consumption. French, Italian and Belgium business confidence were all stronger than expected, which suggests that we could see strength in today’s much awaited German IFO report.

The Belgium business outlook survey tends to have a strong correlation with the German IFO report. Having hit a record high back in December, even if we see a small pullback in German business confidence it may not be entirely bearish for the Euro.

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.