Is the Euro That Strong or Are People Not Interested in Trading It? (page 1 of 2)

DailyFX Fundamentals 06-14-07

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar Hits 5 Year High, Mortgage Rates See Biggest Jump in 3 Years: Problems Ahead?

With the stock market continuing to rise, it is not surprising that the US dollar hit a new five year high against the Japanese Yen today. In fact, the dollar is stronger across the board as inflationary pressures continue to manifest themselves. Producer prices increased 0.9 percent in the month of May while core prices increased 0.2 percent. This brought the annualized pace of inflation to the highest in 11 months. However it was not just past prices that had traders worried. Domestic supply concerns also drove oil prices to an 11 week high. This means that not only did inflationary pressures increase last month, but they are alive and kicking. This should keep Federal Reserve officials extremely hawkish, but don't expect them to raise interest rates anytime soon because thirty year mortgage rates increased to 6.74 percent, the highest level since July 2006. The 21 basis point jump over the past week is the largest rise in 3 years. Thirty year mortgage rates have been skyrocketing since the middle of May and it is certainly not a coincidence that foreclosures hit record levels in the first quarter according to the Mortgage Bankers Association as well. More updated numbers from RealtyTrac Inc. also indicate that foreclosures are up another 90 percent last month. Federal Reserve President Moskow was spot on when he said that the spike in bond yields could trim growth because the housing market is exactly where the pain of higher yields will be felt. Although we expect the US economy to slow, a major contraction will probably be averted thanks to the offsetting stimulus that a weak dollar brings to the table. Consumer prices are on tap tomorrow along with the Empire State manufacturing survey, the current account balance, industrial production and the Treasury International Capital flow report. Given the rise in import prices and PPI, there is a strong chance that CPI will surprise to the upside as well. The rest of the data is also expected to be dollar positive.

Bank of Japan Not Expected to Raise Interest Rates, but Keep an Eye on USD/JPY rate

Carry trades have continued to rise, but the moves today reflect cautious buying ahead of the Bank of Japan's interest rate decision. Although the market does not expect the central bank to raise interest rates, there is a minor risk that they could. The Japanese Yen has sold off significantly over the past few months putting the government under pressure to put a halt to the currency's slide. Now that the Yen has also hit a five year low against the US dollar, the criticism of the currency's weakness could heat up. Prior to that, the Europeans were the primary ones complaining about the weak yen's impact on global trade but the market barely reacted because their bark tends to be bigger than their bite. If the US starts getting uncomfortable as well, it becomes a totally different story. Therefore if USD/JPY continues to rise, the chance of a Bank of Japan interest rate hike will increase as well. In the meantime, continue to keep an eye on the US equity markets. Carry trades will die when the Dow dies. Aside from the BoJ interest rate decision, we also have the tertiary industry index and the BoJ monthly report due for release.

Is the Euro That Strong or Are People Not Interested in Trading It?

The Euro ended the day unchanged against the US dollar and this is either a testament to the currency's resilience to dollar strength or the market's falling interest in what is typically the most actively traded currency pair.