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Euro Likely to Consolodate in Range. Dollar Surging Against Yen

After making an overnight record high, Euro will likely trade in choppy ranges and most traders I spoke with said that they expect very choppy price action with some analysts suggesting that Euro could retrace several big figures down in the next few weeks. In ForexTV's AM Forex New York, Brown Brothers Harriman Senior Currency Strategist Meg Brown says that while momentum is still in Euro and will likely test 1.60 again within the session, a failure to break that mark within a week could trigger a sharp correction of "2-3 big figures." However, as reported in last night's ProSticks technical report, it suggested a 1.65 level within weeks.

Inflation Woes Drive Market Direction

"Overall producer price inflation in March came in red hot although the core rate remained moderate in the latest monthly number. The overall PPI jumped a sharp 1.1 percent, following a 0.3 percent gain in February. The March increase was far above the market projection for a 0.5 surge in the overall PPI. The core PPI rate eased to 0.2 percent, following a 0.5 percent spike the month before and matched consensus expectations…The March PPI report shows that the Fed still needs to worry about inflation and will bump up interest rates. A stronger-than-expected Empire State survey will also firm rates. Equities will still likely wait on key earnings reports,"

Meanwhile, TIC data show that net long-term inflows were up in February to a robust $72 billion vs. 57.1 billion in January. This is surprising considering the weakening dollar and low yield interest-rate environment. The data is a positive for Dollar bulls and presages that smart money is hedging a swing in momentum that may lift the US economy in the intermediate term.

On the negative side the PPI data coupled with little or negative growth supports the stagflation camp and spells trouble for the already beleaguered dollar. As I indicated in my April 1 post, I think the US economy is starting to make a move towards recovery. "Lehman Brothers Holdings Inc. Chief Executive Dick Fuld said on Tuesday the current market environment should remain challenging, but added that the "worst is behind us,"" according to Reuters. With a serious of stimulus packages yet to be factored into the equation I believe that dollar will be poised to recover to the 1.45 level by mid-summer. The EuroZone is showing clear signs of stress as I have predicted and today's ZEW report show deep concern on behalf of German Economists. French inflation figures were not good and will likely deepen with food and energy cost spiraling out of control.

Price Action Brutal in Asian and Early European Session

Dollar Support Rhetoric Escalates at G-7

One thing that most pundits agree on is that any intervention aimed at supporting the dollar would have to be a coordinated effort of the G-7 Central Banks and Government Ministries. In what amounts to monetary policy saber-rattling, G-7 officials emerged from the Washington summit solidly united behind a strong dollar policy. In reality, no one is stepping-up to actually extend an arm to catch the falling knife that is the US Dollar. It is one thing to talk about it; it is a completely different and rare event to actually pull off a coordinated intervention.

The battle of words comes at a time when dollar is seeing almost monthly historic lows and flirting with some very significant technical levels. Dollar supporters have managed to help the greenback recover some lost ground in the past few days, but there is simply not enough fundamental support in the economic cycle to support the dollar in the immediate future.