Dollar Screams Higher as Poole Talks Up 5.25% Rates (page 2 of 2)

The only major point of the debate is how the ECB will respond if the Euro continues to appreciate. The French Finance Minister credited the ECB with today's Euro slide while Trichet came on the wires shortly thereafter clarifying that FX rates did not impact the ECB's decision.

We doubt that this is true since most central banks are sensitive to exchange rates. The ECB needs to be even more careful since the Eurozone is so export dependent. As mentioned in this morning's FX Brief, the ECB learned a solid lesson when the 2004 spike in the EUR/USD to 1.36 pushed the Eurozone economy into a near recession.

They do not want to make the same mistake the second time around, especially since toning down their comments only has positive benefits for growth by boosting exports and keeping demand domestic. Data released overnight was also positive for the Euro with the trade surplus and current account surplus both expanding.

In addition, the OECD's measure for leading indicators increased from 107.9 to 108. In the week ahead, the Eurozone also has a heavy economic calendar with a lot of inflation reports due for release. We expect volatility to continue to pick up in the week ahead.

British Pound - With nothing notable on the UK economic calendar, the British pound extended yesterday's moves by sliding against the dollar and rallying against the British pound. In the week ahead, the UK economic calendar contains some key releases including producer prices, the trade balance and employment data. However, with most reports coming out of the UK showing conflicting results, we doubt that it will give the British pound much direction.

Japanese Yen - The dollar broke higher against the Japanese Yen today despite more pressure on China to revalue the Yuan and the release of a report by a think tank forecasting faster moves from the Bank of Japan. Treasury Secretary Adams was on the wires saying that China is acting far too cautiously and could easily move more rapidly on the Yuan.

This has been the belief that the US government has held for sometime, but revaluation is coming back into focus with the Chinese President visiting the US later this month. The Bank of Japan will be releasing their monthly report next week and it will be interesting to see how positive they are on the economy and how they view the current state of deflation.

Although it is still a bit too early, it will soon be Japan's time to shine when they decide to drop their zero interest rate policy. The market is waiting for this shift and when it does happen it could be extremely positive for the Yen. Also, there is a strong rally that is happening in the Tokyo Stock market, with the Nikkei closing above 17.500 for the first time since July 2000.

Foreign investors will only become more interested in Japanese investments. In fact, the yen is already rallying against the crosses.