U.S. Dollar Headed for Record Bullish Week

The U.S. currency is heading for its biggest weekly gain since March 2005 against the European currency as the dollar benefits both from past Bernanke’s statements and the current expectations for G8 meeting.

Many reasons stand behind such a fast dollar appreciation this week — among them Fed’s intention to raise the interest rate to fight the inflation and the Treasury Secretary Henry Paulson’s statement that the U.S. may buy out its currency on the Forex.

Consumer price index is also coming out in U.S. at 12:30 GMT today — the reading above the expected 0.5 percent gain will definitely push dollar farther up as the bullish expectations on the interest rate will prevail then.

The U. S. dollar has also its best week since February 1999 against the Japanese yen. Financial officials from Europe say that they are satisfied with the current dollar’s appreciation as it benefits their national exporting companies.

More investors become confident that the Federal Reserve’s next step will be increasing the interest rate. The only questions that they are asking is when and by how much.

Finance ministers from the Group of Eight nations are meeting today and tomorrow in Osaka, Japan to discuss the global problems. Some currency traders believe that the important statements regarding the U.S. dollar may be made there with a positive feedback for the greenback.

EUR/USD fell today from 1.5452 to 1.5401 with a daily low at 1.5386 as of 8:03 GMT. GBP/USD remained virtually unchanged today opening at 1.9455 with a close at 1.9447 so far; the daily low was at 1.9428. USD/JPY rose from 107.87 to 108.00 today.

Bernanke’s Warning On Inflation Boosted Dollar

The dollar rallied across the board after Fed Chairman Ben Bernanke unexpectedly warned of inflation risk via satellite before International Monetary Conference Central Banker’s Panel in Spain. He said the central bank is “attentive to the implications of changes in the value of dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate”. This is the first time Bernanke highlighted the impact of dollar weakness on rising inflation, indicating that the central bank is not going to cut rates again. The dollar gained around 1% to 105.54 versus the yen. The euro slipped almost 200 pips from 1.56 to as low as 1.5412 against the dollar.

Interest rate futures on the Chicago Board of Trade showed a nearly 70% chance that the Fed will raise interest rates above 2.00% by the end of this year.

A report released later pushed the greenback even higher. US factory orders rose 1.1% in April, beating the estimate of 0.1%. In the same month, durable goods orders fell 0.6% as expected while core durable goods orders rose 2.4%.

Dollar Firm on Data

The dollar remained firm after a sharp rally yesterday in reaction to Fed Chairman Bernanke’s warning on inflation.

The currency extended its gains today as several economic reports came out better than expected. US ADP job report showed 40 jobs were added in private sector in May, beating the estimate of a 30k fall. We are awaiting the non-farm payrolls report from the Labor Department due this Friday to take the pluse of the nation’s whole job market.

Other US data released today include the first quarter productivity, which rose 2.6% versus the estimate of 2.5%, and May non-manufacturing ISM, which came out at 51.7 above the estimate of 51.0.