Dollar Rallies as Stocks Hit Six Week Highs (page 1 of 2)

DailyFX Fundamentals 04-09-07

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar - Even though US traders are back at their desks today, currency prices have barely moved with Europe still closed for Easter Monday. Today's lack of volatility is a testament to how significant European volume is to day to day market activity. London is and has long been the financial center where the largest amount of FX volume is dealt. US traders have expressed their bias by taking the dollar slightly higher, but they could be holding back any aggressive positioning until their European counterparts return to their trading desks tomorrow. The biggest development in the markets today is the sharp drop in oil prices. Traders have shrugged off Iran's announcement that they plan on starting "industrial-scale" enrichment of uranium to focus on surging supply. After hitting a year to date high of $68 two weeks ago, oil prices have trended lower, with the latest wave of weakness lasting for six consecutive trading days. Although this could ease some of the Federal Reserve's concern about inflationary pressures, members of the central bank's policy making committee will most likely stick to their hawkish bias as the stock market hovers around six week highs, the labor market continues to tighten, and the overall housing market holds steady despite the problems in the sub-prime lending sector. Only a few of the Fed Presidents are scheduled to speak directly about the economy and monetary policy this week. Fed Presidents Mishkin, Plosser and Fisher are scheduled to speak tomorrow. Mishkin will be talking about "Monetary Policy and the Dual Mandate" while Fisher and Plosser will be talking about the Fed's "Credibility and Commitment." Mishkin is the only one of the three that is on the Fed's Board of Governors; both Fisher and Plosser are non-voters. Aside from the Fedspeak, there is no data of consequence on the US calendar. The minutes from the Federal Reserve meeting held in March is due on Wednesday and we will touch more on that in tomorrow's Daily Fundamentals.

Euro - German, French and Italian markets all remain closed today for Easter Monday, but this is most likely the calm before the storm as the biggest event risk this week is in the Eurozone. Our center focus is the European Central Bank's monetary policy meeting on Thursday. The ECB is not expected to change interest rates, having only lifted them last month. However with the central bank still on track to raise interest rates in the second quarter, the comments by central bank President Trichet will be particularly important. A look back at Trichet's changing language between the last two rate hikes in December and March may shed some light on what Trichet will say at the upcoming meeting. Before the most recent rate hike in March, Trichet raised rates in December 2006. At the December meeting, after raising rates, Trichet was optimistic, but intentionally dropped the words "strong vigilance" from the comments that he made in the accompanying press conference. He reconfirmed that he has not used the words "strong vigilance" in any of his comments at the January meeting and rates were left unchanged in both January and February. At the press conference after the February meeting, Trichet reintroduced the words "strong vigilance," paving the way for the quarter point tightening that we saw in March. This suggests that if Trichet plans on raising rates in May, then he could reintroduce the words "strong vigilance" this Thursday. Anything otherwise would indicate that he wants to delay a rate hike to June.