This week ended with the U.S. Dollar posting its biggest gain since 2005. It is hard to believe that just a week ago the U.S. Dollar closed weak after the Euro soared on a worse than expected U.S. unemployment report. Since then comments from the Fed and the Treasury helped turn the Dollar around to finish the week in a strong position.

On Monday, Treasury Secretary Henry Paulson said in an interview with CNBC that he would never rule out currency intervention. This comment packed some punch as the Euro had its largest decline in close to a month. The threat of an intervention put fear in the market especially since it has been rumored that the Treasury was the muscle behind much of the decline, which started in April.

After Paulson's comments, the Dollar received an additional boost from Federal Reserve of New York President Timothy Ginter who stated that the central bank is watching the Dollar.

On Tuesday, the Forex markets reacted swiftly and decisively after Fed Chairman Bernanke announced that economic risks have faded and implied that interest rates may have to go up to fight rising inflation.

Throughout the week, financial traders who bet on the direction of interest rates by committing to spread positions started factoring in the possibility of a rate hike on August 5. The sentiment rose throughout the week from 0% on June 6 to close to 60% on June 13. Traders also increased their bets that the Fed will raise rates in December from 67% to 96%.

Additional pressure was placed on the Euro as traders anticipated a string of positive comments from participants of the G-8 meeting, which was taking place during the last half of the week. Next week may start bullish for the Dollar as weekend comments from the G-8 are published.

At times this week, mixed comments from ECB members added confusion to the market. The confusion arose when one member said that the anticipated July rate hike would be the start of a series of interest rate hikes. By the end of the week, however, his comment was contradicted twice by other members of the ECB, who believed the rate hike was for July and not beyond.

Overall, the combination of the Fed and the Treasury comments had the effect of a verbal intervention. This strategy weighed on the Euro all week as it retraced its entire rally from late last week to close sharply lower for the week. Next week, expect to see a reaction to the G-8’s statement, which will be released over the weekend. The statement is expected to be supportive to the Dollar. Chart watchers should note that a trade through 1.5282 would be bearish to the Euro with a strong possibility of a further decline to 1.46 over the next two months.

Bank of Japan Keeps Interest Rates at 0.5%

The USD/JPY continued to rally toward a major retracement area at 109.94. This price is expected to put up some resistance, but overall, the trend is strong and expected to work higher.

The Japanese Yen did not receive any support from the Bank of Japan as it voted to leave rates at 0.5%. With the U.S. threatening to hike rates, the 2-year Treasury Note over a comparable maturity Japanese security widened to 1.9 percentage points, up from 1.5 on June 6. The uptrend should continue as the interest rate differential is making U.S. denominated assets more attractive.

British Pound Closes in a Position to Test Multi-year Low

Despite several attempts during the last two weeks to break out to the upside, GBP/USD traders could not overcome the pro-Dollar comments from the U.S. Treasury and Federal Reserve. The threat of an intervention from the Treasury was definitely a blow to the Pound as it occurred at a time when the market was forming a double-bottom position.

Talk of interest rate hikes in the Euro Zone and the United States also hurt the Pound, as the Bank of England remains helpless, as it has to deal with a weak economy. Consumer Confidence remains down while the housing industry struggles to recover.

Earlier in the month, the Bank of England voted to leave interest rates at 5%. Since then both the ECB and the Fed reiterated their threats for higher rates. With this action the interest rate differential is going to widen, making Pound based assets less attractive.

The charts are showing extreme weakness as the series of lower tops and lower bottoms indicate the formation of a major downtrend. The charts indicate the next downside target is 1.9181, the March 7, 2007 bottom.

Threat of Intervention and Interest Rate Hike is too much for Swiss Franc

The threat of a U.S. currency intervention and an interest rate hike was too much for the Swiss Franc to defend against as the USD/CHF changed the main trend to up for the first time in several weeks.

Over the past two weeks, strength had been appearing in the Swiss Chart as economic news regarding inflation and low unemployment indicated that the Swiss Bank would have to raise interest rates. This news put a positive spin on the market as the U.S. economy was still suffering from economic uncertainty.

Since Fed Chairman Bernanke implied that rates would move higher, and Treasury Secretary Paulson announced a possible intervention, the USDCHF stopped going down and reversed to the upside. The strength from these positive comments helped trigger a strong move through a pair of tops at 1.0521 and 1.0528 to turn the main trend up.

The next upside targets are another pair of main tops at 1.0601 and 1.0625. The first major obstacle of this rally is a 50% price a 1.0630.

U.S. Dollar Remains Firm versus Canadian Dollar despite Change in Bank of Canada Tone

The U.S. Dollar remained firm throughout the week against the Canadian Dollar despite the Bank of Canada changing from a dovish attitude toward interest rates to a more hawkish tone.

For weeks, economic reports out of Canada suggested that the Bank of Canada would have to cut rates by at least 25 basis points. With the ECB and the Fed threatening to hike rates in July, the Bank of Canada decided to take a pass this time and left rates unchanged.

Subsequent commentary from the Bank of Canada indicated that they had shifted their tone from fighting slow growth to battling the threat of inflation.

This change in tone interrupted the USD/CAD uptrend temporarily, but did not do any significant damage to it. In the worst-case scenario, the market may retrace 50% of the recent gains. However, the combination of the threat of an intervention and a hike in rates is likely to keep the uptrend in tact and support much a stronger U.S. Dollar.

AUD/USD Reaches Multi-Week Low

Sellers dominated the AUD/USD all week as the intervention treat from the U.S. Treasury and the possible rate hike by the Federal Reserve put pressure on the Aussie.

Another blow to the Aussie was the news that the Australian economy lost the most jobs in 19 months. This was a sign that the economy was slowing down, and that its high interest rates were unwarranted.

The interest rate differential between the Australian and U.S. rates also declined. This could cause U.S. investors to pull their money out of high-yielding Australian assets.

The only positive for the week was Governor Glenn Stevens saying that local interest rates at a 120-year high are essential to restrain inflation. This gave some hope to the market that rated would not be lowered anytime soon.

The charts indicate the down move is likely to continue with .9083 the next target.

NZD/USD Starts Bracing for Interest Rate Hike

The NZD/USD continued to take out multi-month lows this week as the threat of a U.S. intervention, higher U.S. interest rates and lower domestic rates attracted huge sellers to this pair.

The interest rate differential narrowed indicating that U.S. investors may be cashing in their higher yielding New Zealand counterpart financial instruments. Traders have been taking advantage of the much higher rates in New Zealand versus lower rates in the United States.

New Zealand Governor Bollard implied this week that the record setting rates at 8.25 percent this week might have to come down because the economy needs a stimulus. Although retail sales were up last month, the country is still suffering from high unemployment and a worsening housing market.

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