Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Dollar Rallys Sharply After ECB Backs Off From Interest Rate Rise

Currencies / US Dollar May 06, 2011 - 01:47 AM GMT

By: Mike_Shedlock

Currencies

Best Financial Markets Analysis ArticleECB President Jean-Claude Trichet has backed off his usual way of signaling a rate hike, which is to use the phrase "strong vigilance". Instead, Trichet said today "the ECB will monitor inflation risks very closely".


The market interpreted this change as a pause in rate hikes by the ECB. Unlike most, I had been expecting this action by Trichet for many reasons. I gave some of those reasons in my speech last week at Saxo bank. (See Meeting with Saxo Bank Chief Economist; My Speech in Copenhagen; Images of Stockholm and Copenhagen) for a discussion and lots of digital images.

Why I expected Trichet to Curtail Rate Hikes
  • Strengthening Euro is hurting European exports
  • ECB's One Size Fits Germany Policy is not viable.
  • Rate hikes would exacerbate problems Spain, Greece, Portugal, Italy, Ireland, Greece, and Spain (the PIIGS)
  • The recovery in Europe is not on solid footing
  • Hiking rates to combat oil prices makes no sense if the spike in oil prices is not caused by a rise in demand
Fundamental Factors Affecting Currencies

  1. Expected and actual interest rate actions
  2. Direction of interest rate differentials
  3. Actual interest rate differentials
  4. Demand for dollars in debt deflation credit crunch
  5. Deficits
  6. Actions on Deficits
  7. Trade imbalances

The top reason the Euro has been soaring was an expectation the ECB would hike three times or more and the Fed none. Trichet threw cold water on that expectation today, and the Euro promptly sank 3 cents vs. the US dollar.

Euro 15-Minute Chart


Minneapolis Fed Noise About Rate Hikes

Meanwhile, not that anyone believes it (I sure don't), but Minneapolis Fed President Narayana Kocherlakota says ‘Modest’ Rise in Key Rate Is Desirable This Year.

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said it would be “desirable” to lift the target for the benchmark U.S. interest rate by a “modest amount” this year, based on his inflation forecast.

The Federal Open Market Committee “should raise the fed funds rate by around 50 basis points” if core inflation rises by 1.5 percent this year, he said today in remarks prepared for a speech in Santa Barbara, California. “Under my baseline forecast, it would be desirable for the FOMC to raise the fed funds target interest rate by a modest amount toward the end of 2011,” said Kocherlakota, who votes on monetary policy.

Fed Won't Hike

I highly doubt the Fed seriously entertains the notion of hiking this year. I even have a December Eurodollar options bet on inaction by the Fed. I see a slowing economy and a likely collapse in commodity prices to boot.

However, the noise from Kocherlakota comes at the perfect time today to support the US dollar given the widely unexpected announcement from Trichet today.

Commodity Factor

Moreover, should commodities collapse, it is highly likely the commodity currencies such as the Australian dollar and Canadian dollar sink with it.

If the Reserve bank of Australia acts to support the Australian property bubble collapse with rate cuts (an action I expect but the market doesn't), that will pressure the Australian dollar.

Note once again points number 1-3 above regarding currency fundamentals. Although there is a huge interest rate differential between Australia and the US, if the direction of differential narrows, especially if it narrows unexpectedly, the Australian dollar will likely give up ground to the US dollar.

Finally, should there be another US credit crunch (an event I think is probable but have no specific time frame in mind), demand for US dollars to pay back debts will be high.

Few understand the role of credit and debt when it comes to debt-deflation demand for dollars.

All things considered, anti-US Dollar sentiment is so extreme and fundamentals so poor for other currencies (as compared to widely expected actions and commodity fundamentals), a rise in the US dollar could easily last for months to the absolute astonishment of the hyperinflation fanatics.

Everyone understands the problems with the US dollar. Few bother to look at problems elsewhere or other factors including reversals in extreme sentiment.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2011 Mike Shedlock, All Rights Reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in