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Dollar gains on Euro as rate hike talk picks up

7 June 2010

The Euro has fallen to levels not seen since the first half of 2006 against the dollar as talk of pending interest rate hikes pick up in the United States. One Euro is currently worth $1.2058 after falling as low as $1.2017 in early Friday (June 4) morning US trade.

The next important level of modest long-term support for the Euro comes into play in the $1.17-1.18 range, though the break of the major support around $1.24-1.25 may have opened the flood gates to an inevitable move toward the $1 plateau.

As the European credit crisis stays in the news, talks of US economic stability and the call for rate hikes have increased. Speculators have already been buying in, as the Euro has dropped nearly 18 pips just since early to mid-March.

The latest dip lower for the Euro was on positive dollar momentum after three Fed officials gave strong hawkish statements Thursday with regard to interest rates. High unemployment has been the hold up for rate hikes, which are needed at some point to prevent inflation.

However, Thomas Hoenig of Kansas City, Dennis Lockhart of Atlanta, and Dallas Fed President Richard Fisher all expressed a desire to see the Central Bank raise borrowing costs to one per cent by summer’s end. Earlier this year, the general sentiment from the Fed was that rates would be near zero for an ‘extended period’.

The timing of rate hikes is a challenge as jumping in too soon could be a problem for a rebounding economy. A poor jobs report Friday morning did not help the cause as unemployment remains the laggard in the rebound.

The concern is that with rates overly low, inflation creeps in and then it might take a more aggressive hike to combat it. Thus, more members of the Fed are speaking up that they would like to see a steady and modest increase of the benchmark Fed lending rate.

A sooner than later rate hike, combined with ongoing struggles in Europe could spark an even faster move lower for the Euro.

The British Pound, for its part, remains fairly steady against the dollar with a current rate of $1.4570. The Pound has been consistent in a tight mid-$1.40s range throughout much of the European credit panic in the last month. Britain seems to be holding up well at the moment, despite major issues in Greece, Spain, and Portugal, among others.

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