Competitive Hawkishness Emerges

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Good Morning,

Gold prices regained 1% of the 3% they lost in yesterday's rout overnight, as scattered physical buying emerged in Asia. Reports from India show that demand dried up shortly after prices started to recover and buyers are still largely sidelined. Somewhat toned-down euro rate hike talk emerged from the ECB early today and was seen at odds with concurrent statements made by other officials about the same issue. To wit:

Reuters reports that "the euro momentarily hit a session low against the dollar after European Central Bank board member Jeurgen Stark was reported as saying the central bank is not considering a series of rate rises, even as investors expect a hike in July." A matter of nuance, this. That the coming rate hike(s) are not intended to constitute a string is one thing. The fact that they are coming, is another. Reuters also reports that: "European Central Bank (ECB) chief Jean-Claude Trichet, who shocked markets last week by saying ECB rates could rise next month, reiterated his comments on Monday.

Other European central bankers weighed in yesterday, with Erkki Liikaken, a Finnish member of the ECBs rate-setting Governing Council, saying the bank was in a state of "heightened alertness." Politicians joined the fray ahead of a meeting in Japan where food and fuel price inflation was expected to dominate talks among finance ministers of the Group of Eight (G-8) rich industrialised states. "I think we need to take very seriously the concerns that have been expressed by the central bank," German Deputy Finance Minister Thomas Mirow said ahead of the G-8 meeting."

The US dollar headed lower this morning, losing about .25 on the index at 73.43 whilst crude oil gained $2.40 at $133.72 and that combination gave bullion additional energy to attempt to repair the fresh damage sustained on Tuesday. A few Asian central banks were seen trying to halt the greenback's rally by selling it to support their currencies (Thailand, S.Korea) but such action elicited ominous comments among currency strategists.

Bloomberg quotes Morgan Stanley's Stephen Jen as remaking that: " U.S. policy makers have set the stage for ``outright intervention'' to sever a vicious circle between a weak dollar and high oil prices. The U.S. campaign for a stronger currency, aimed at containing oil prices, ``will work.'' Thus, risks of further declines remain in place for gold (see below) as the new anti-inflation/anti oil attitude among central banks is spreading and as the level of bargain hunting at recent lows was rather anemic. The $850 area continues to present a potential tipping point for the precious metal.

New York spot prices opened with a $9.40 gain at $876 per ounce. Silver was up 4 cents at $16.60 while platinum gained $27 to $2019 and palladium added $5 to $427 per ounce respectively. Today's economic calendar offers consumer comfort index figures and non-manufacturing activity level among other statistics. The focus among players remains on interest rate and inflation combat talk, although crude oil prices and anti-Iran rhetoric by Mr. Bush continue to be attentively followed as well. Thursday and Friday will offer more information about the state of the US labour market as well as more opportunity to move these markets more decisively.

Will the ECB celebrate its 20th birthday, or will 2018 see economic historians writing about the noble but ultimately flawed experiment that some see the single currency to be? We bring you excerpts from an article in The Guardian and let you make up your own mind:

"The European Central Bank celebrated its 10th birthday last week with a giant cake and, four days later, out of the remains sprung an ugly rabbit: the central bank could raise interest rates next month to contain soaring inflation that is now running at almost twice its "close to but below" 2% target.

The brutally frank response by ECB president, Jean-Claude Trichet, to the first question at his monthly press conference not only broke with his typically arcane replies. It smashed the consensus among economists - and anxious political leaders - that a deteriorating eurozone economy would force the bank to cut borrowing costs later this year - or early in 2009 at the latest.