By DailyFX - US Dollar.The US Federal Reserve raised interest rates for the fifteenth time by a quarter of a point today to 4.75 percent,...

... the highest level in 5 years.

The FOMC statement was
also much more bullish than the market was expecting. With Fed Fund futures
originally showing only a small minority favoring 5.25 percent rates, the positive
outlook on growth and concerns for rising inflation pressures has 5.25 percent the
more likely top now. Newly installed Fed Chairman Ben Bernanke made his mark at
today's meeting by changing the entire middle paragraph, or the meat of the
statement. The committee now believes that the weaker numbers that we saw in the
fourth quarter of last year were due to temporary or special factors. We will be
fascinated to hear what these "special factors" are since most of the talk of the
slowdown was due to higher interest rates crimping the housing market or energy
prices. The Fed sees current growth as strong but expects it to moderate to a more
sustainable pace. However in contrast to Greenspan's more concise comments on
inflation, in true Bernanke style, the updated comments on inflation were far
clearer. The Fed said that even though the "run-up in the prices of energy and
other commodities appears to have had only a modest effect on core inflation,
ongoing productivity gains have helped to hold the growth of unit labor costs in
check, and inflation expectations remain contained. Still, possible increases in
resource utilization, in combination with the elevated prices of energy and other
commodities, have the potential to add to inflation pressures." The bottom-line is
that the dollar is rallying on the more hawkish comments, especially since they
reiterated that "further policy firming may be needed." This suggests that we are
in store for two more rate hikes. However with a great deal of economic data still
due for release this week and five central bankers scheduled to speak, we expect a
lot more volatility in the days to come. A vertical rally in the dollar here on
forward is far from certain.

Euro

To the surprise of the market, the German IFO survey jumped from an upwardly revised
103.4 to 105.4 for the month of March. The Euro screamed higher on the back of the
release, confirming that the stronger number caught the market entirely off guard.
Of course the Euro lost most of its momentum going into and on the back of the US
interest rate hike. The long stretch of stronger business confidence in Germany has
continued for yet another month indicating that even though analysts or the so
called "experts" are becoming more pessimistic about the economic outlook,
businesses are not. In fact, business confidence is now at a 15 year high. The
worry of analysts was that higher interest rates around the world would hurt growth
and eventually also negatively impact German exports. However, businesses may not
be thinking as far forward and are instead basking in the benefits of a weak Euro.
It certainly doesn't hurt that inflation is also stronger with M3 rising from 7.6
percent to a higher than expected 8.0 percent in February. Booming confidence and
signs of inflation pressures provides more confirmation for the ECB to raise
interest again in May. Central bank President Trichet was on the wires this morning
reiterating his view that interest rates remain at very low levels. Meanwhile, as
expected, the FX market has made little mention of the strike in France that began
today. The Eurozone economic calendar tomorrow is light, which means that EUR/USD
traders will probably spend the day continuing to mull over today's US Federal
Reserve rate decision.

British Pound

Although we saw weaker UK economic data today, hawkish comments from Bank of England
Governor King helped limit losses in the British pound. Total business investment,
which is not usually that significant given its infrequency, fell 0.9 percent in the
fourth quarter. BoE Governor King however remains optimistic on growth and
inflation. Even though he doesn't think that consumer spending would return to the
"heady days" of the past, he does believe that it is on path to return to the
average growth of the past. Furthermore, he thinks that there is risk for inflation
to overshoot the central bank's forecast, especially with oil prices now trading
above $65 a barrel. However, with the choice only between cutting rates or leaving
it unchanged, the BoE is still on a clearly different path than the ECB. Tomorrow
is an extremely busy day in the UK with GDP, current account, consumer credit, money
supply, mortgage approvals and the CBI distributive trades report due for release.
Most of the reports are expected to show improvements, which could be positive for
the British pound.

Japanese Yen

Earlier gains in the Japanese Yen were erased as carry traders seeking more yield
jump right back into the most popular carry trade of 2005. If a 4.50 percent
interest spread was attractive, 4.75 percent will be even more so. Although fiscal
year end repatriation still remains a predominant theme, with the US Federal Reserve
meeting, carry is the bigger focus of the day. The biggest story though is China,
where news has surfaced that they had surpassed Japan as the world's largest holder
of foreign exchange reserves. Official media reports are saying that China's
reserves hit US$853.7 billion at the end of February, compared to Japan's US$850.1
billion. To clarify, this is total reserves and not US reserves. It is estimated
that China holds 70 to 80 percent of its reserves in dollars, which means that they
have approximately $650 billion dollar denominated reserves. Japan on the other
hand, is said to have over $800 billion in dollar reserves.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com
By DailyFX

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