Euro on Shaky Ground

It seems like every day the euro hits another high.  At least, that’s been the story of the forex markets for the last five days.  A combination of dollar weakness and the market’s belief in the Eurozone economy has pushed the euro to new heights.  Yesterday was no different.  Bear Sterns officially warned their hedge fund investors that there was no value left in the fund.  With fears of the subprime crisis already strong in their minds, traders were worried that foreign investors would seek to move away from US assets.  Especially after the recent diversification of foreign exchange portfolios (basically, the selling-off of US Treasuries), the Bear Sterns news triggered a dollar decline.  Even the poor German ZEW survey released yesterday did little to stem US losses.

But today’s news may signal a top in the EUR/USD pair.  Consumer prices in the United States rose 0.2% in June. It is the smallest gain in five months but still a reversal from the drop in headline PPI seen yesterday.  Core prices also rose 0.2% versus an expected increase of 0.1%.  Housing starts also rose 2.3% this morning, providing further support for the greenback.  Lastly, Fed Chairman Bernanke is scheduled to give his semiannual report to Congress at 10:30 AM.  Today’s data probably eliminate the possibility of interest rate hikes in the near future, leaving Bernanke free to remain hawkish on inflation.  That’s why DailyFX.com reports that his speech is likely to be dollar bullish.  EUR/USD has been trading within a range of 80 points for the last five days, but if Bernanke’s speech goes as expected, we could see a dollar-positive breakout.

Euro bulls should also be concerned about recent developments regarding the European Central Bank.  New French President Nicolas Sarkozy has called for European finance ministers to be granted more influence in monetary policy decision-making.  The most direct consequence of such a move would be a loss of political independence for the ECB, and that would not be good news for the euro.  German policy makers have traditionally been for an independent central bank, but a recent Bloomberg.com report suggests that German Chancellor Angela Merkel may be coming around to Sarkozy’s viewpoint.  ECB President Jean-Claude Trichet has warned against the disastrous consequences of such a development, even suggesting that it may violate the European Commission Treaty.  This is an important situation for traders to stay on top of because if Sarkozy is successful in imposing political control upon the ECB, we could see the bottom fall out of the euro soon afterward.