Dollar Continues To Strengthen As Traders Bet On Fed

Source: DailyFX

Despite much better than expected results from the Industrial Production report the euro continued to lose ground to the dollar for most of Asian and European sessions trading as low as 1.5390 before bargain hunting and strong economic data steadied the unit. Industrial Production in EZ rose to 0.9% from 0.0% expected with France and Italy posting surprisingly strong gains.

The news continues to show that the region's producers are able to overcome high exchange rates and high energy prices and grow their business. However, the report must be taken with a certain degree of skepticism as the data is two months old and does not reflect the massive increase in energy prices that have occurred since. Nevertheless, the IP numbers are an impressive testament to the productivity of the region's manufacturing sector that has managed to perform far better than expected in the face of tremendous obstacles.

The euro saw little help from the economic news however, as focus has turned to the considerably more hawkish tone of US monetary policy. With Fed Vice Chairman Kohn last night reiterating Chairman's' Bernanke's concerns regarding inflation expectations, the market is quickly coming to the conclusion that US monetary authorities will now shift their attention towards re-establishing piece stability even at the expense of some possible near term economic pain. The dollar therefore strengthened not only against the euro but against the yen as well as US rate expectations have been ratcheted higher.

One dollar that has not fared nearly as well as the greenback last night was the Aussie. Australian employment data shocked to the downside printing at -19.7K versus 13.5K projected. The report was the worst decline since 2005 and brought to an end a string of 18 successive positive employment reports. As we noted earlier in the week, a bet on Australia is a bet on China and with China's two biggest customers – EZ and US experiencing a serious slowdown in consumer demand Australia will face a difficult time as the summer progresses. Today's employment report has already followed a series of economic disappointments over the past several weeks and may be an indication that the great economic boom Down Under is coming to an end.

One reason that the buck is stronger tonight is due to speculation that US Retail Sales will show a better than expected result as tax refund checks make their way through the system. A strong print would provide even better support for the Fed's recent hawkish stance, as it will allow the policymakers to consider a rate hike without the risk of further aggravating the economic situation and may push USDJPY to 108.00 figure on rate hike expectations.