Intervention Drawing Near

G8 finance ministers met last week to discuss the detrimental effects of rising (commodity) prices on the global economy. Oil prices and commodity prices have in some cases doubled over the last year, contributing to a nasty surge in worldwide inflation rates. While the Dollar was not technically a topic of the discussion at these particular meetings, it was broached tangentially because of the perceived relationship between the weak Dollar and high commodity prices. Accordingly, Central Bank intervention on the Dollar's behalf could theoretically be justified on the basis of both mitigating inflation and facilitating global macroeconomic stability. The "I" word hasn't been mentioned explicitly, but its likelihood increases with every up-tick of inflation and every down-tick of GDP. It is no surprise that in the weeks leading up the actual G8 conference, the Dollar has sustained its strongest rally against the Euro in nearly 3 years. Forbes reports:

Last week Federal Reserve Chairman Ben Bernanke flagged a change in Washington by linking the weaker dollar to inflation and saying he was watching the currency closely with the Treasury. Then U.S. Treasury Secretary Henry Paulson refused last week to rule out direct intervention in currency markets.

Euro Rallied on Trichet Comments

The euro rallied broadly after ECB President Trichet delivered surprisingly hawkish comments following a widely expected unchanged rate decision.

Trichet indicated that some ECB officials argued for rate hike later this year, and the central bank is in a state of “heightened” alertness” over inflation. His comments added to expectations for a rate move on its July meeting. The euro rose sharply from around 1.54 to as high as1.5562 versus the dollar, and gained more than half a cent to a 9-day high at 0.7956 versus the sterling. Also the euro advanced against the yen to test a key resistance at 165.

As Trichet’s statements dominated the market, other data released today were largely ignored. The Bank of England also left its interest rates unchanged at 5.0%. US weekly jobless claims fell 15k to 357k and continuing jobless claims fell slightly to 3.093m. The dollar edged up initially after the data but the following Trichet’s talk erased its gains quickly.