Could This Be The Start Of The Next Wave Of Dollar Strength?

Here are today’s market-moving numbers in a nutshell: the US non-farm payrolls showed a loss of 62,000 jobs and the unemployment stood at 5.5%, close to what the majority of the market had expected. And over in the Euro area, the European Central Bank has raised its main interest rate by 25 bp to 4.25%, as predictable as receiving a present on your birthday (from yourself that is).

Traders who had positioned themselves ahead of these releases to be long on the Euro and short on the US dollar were all wrong. In a press conference following the rate announcement, ECB chief Trichet did not give any timetable of further rate increases, unlike the previous time. Instead, he was ultra-dovish in his speech, saying that “today’s decision will contribute to achieving our objective”, which basically means “we think the current 4.25% is enough to contain high inflation in the Eurozone for now”.

Trichet’s use of words such as “no bias” or “pre-commitment” to more rate hikes basically swept all the bets off the table, right into the hands of Trichet, the dealer. Futures traders have already priced in a least two more rate hikes from the ECB later this year, so when they hear “no bias”, it’s like hearing a fire alarm to evacuate the crowded office building. Trichet is playing real smart: He has no desire to see the Euro currency going higher, like many other European policymakers. Even French Finance Minister Christine Lagarde said today that higher rates may hurt Europe’s competitiveness by pushing the Euro higher against the dollar. She is right.

The US dollar rose nearly 200 pips against the Euro following Trichet’s speech, and frankly, since the US NFP blew over like a drizzle, traders are very likely to get out of dollar short positions and establish new long ones. That could be the beginning of a next wave of dollar strength.

Economic Calendar for Friday:

US financial markets closed for Independence Day

Canada Ivey PMI 1400 GMT

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Comment by Barry Schatz

2008-07-03 13:28:01

You’ve got to be kidding! The dollar is weak on the merits, not the spin. When traders are over-long the Euro, comments such as Trichet’s do no more than remind us to curb our enthusiasm; it does not reverse the direction of the bet. The reasonable bet is that the Euro is being reinforced to a certain extent while the Dollar is (still) not.

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