Expectations of Rising Interest Rates Pull Up Euro, Aussie

The Euro rose to a three-week high of 1.5680 against the US dollar Tuesday after Wolfgang Franz, head of the Center for European Economic Research, or ZEW, said he thinks the ECB “will raise rates in the near future”, but “would recommend that the ECB keep rates constant until there is clear evidence the financial crisis is over”. EUR/USD initially dipped after the release of the economic sentiment survey from ZEW that came in weaker than expected, but then rose higher on the ZEW president’s comments. Germany’s economic sentiment index fell to -41.4 in May, compared with an expected reading of -37. But it’s not just a one-way street in the currency market today: US dollar weakness was limited somewhat as it got some support from higher-than-expected inflation data which showed that US producer price index for finished goods rose 0.2% in April, following a 1.1% increase in March, and core prices excluding food and energy, rose 0.4% last month, twice the 0.2% forecast. Such firm inflation numbers could persuade the Fed to keep rates on hold.

The US dollar also got a bit of support after Federal Reserve Vice Chairman Donald Kohn said the US economy will improve in the second half of the year and gather some strength in 2009. His cautiously optimistic outlook mirrors that of US Treasury Secretary Paulson. Kohn also said the Fed’s current policy stance “appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term.”

Aussie Dollar Shot Up Again

The Australian dollar hit another 24-year high for the second straight day after minutes of the Reserve Bank of Australia’s last meeting indicated that the board discussed rate hikes for a “considerable time”. Australia is currently the odd one out among the world’s major central banks in that it is seriously considering raising interest rates while others are busy cutting. AUD/USD reached as high as 0.9620, its highest point since March 1984.

Forex Trading

USD/CHF fell below 1.0390-1.0400 to a session low of 1.0375. If it breaks below 1.0350, it could target 1.0300-10. Beware that USD/CHF is on the verge of breaking down from its double top, but the said bear target could provide some temporary bidding interest. If that gives way, more aggressive shorts could join in. EUR/USD broke above 1.5650 to a high of 1.5680, with 1.5700-10 its nearest ceiling. Its strength of holding above 1.5500 could send it on its way higher.

Wednesday:

Australia Westpac consumer confidence 0030 GMT

Bank of England minutes 0830 GMT

US MBA mortgage applications 1100 GMT

Canada CPI 1100 GMT

US FOMC minutes 1800 GMT

Japan merchandise trade balance 2350 GMT

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