The U.S. Treasury, the guardian of the U.S. Dollar, finally stepped up to the plate and took a hard swing to counter ECB President Trichet's extremely hawkish comments last week regarding an interest rate hike in July.

Since Trichet's comments were made public, the Dollar has dropped significantly subsequently triggering a massive rally in the crude oil market.

Early last week Fed Chairman Bernanke stated that the Fed is attentive to the value of the Dollar and its effect on crude oil prices and inflation. He also stated that he was in close contact with the Treasury Department regarding the matter.

Although at the time, Bernanke's comment helped rally the Dollar and break crude oil, in my opinion, many traders privately thought that he was out of his league commenting on the value of the Dollar since it is the job of the Treasury Department to protect the Dollar.

Now that almost a week has passed since Bernanke's supportive comments, it looks as if traders realized late last week that despite what he said, he really could not do anything about the value of the Dollar short of a surprise rate hike. With the Fed implying since March 18 that it is finished cutting rates, and the market pricing in a Fed rate hike by December, all Bernanke could do was try to talk up the Dollar.

On Monday, however, 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 that started in April. All eyes will be focused on the Treasury and on the other members of the G-7 who allegedly backed a stronger Dollar earlier in the spring.

The Dollar received an additional boost from Federal Reserve of New York President Timothy Ginter who stated the central bank is watching the Dollar. So far, the comments from the Fed and the Treasury are acting like a verbal intervention. This strategy has worked for at least one day as the EUR/USD retraced close to half of the rally from late last week.

With the Fed's hands tied regarding interest rates because of a lingering financial crisis in the U.S., last week's poor unemployment picture, and rising inflation, it is going to take strong supportive comments from the Treasury Department to provide the muscle to gain control of the Dollar.

Fundamentally, other supportive factors for the Dollar were the increase in contracts to buy existing homes, and the tightening of the interest rate differential, which makes Dollar denominated assets more attractive to investors.

With both the ECB and the Fed/Treasury firing out hawkish commentary, look for the Euro to trade on both sides of the retracement zone at 1.5700 to 1.5550 until the fundamentals shift in favor of one currency over the other. Traders will soon grow tired of the chatter and develop an appetite for more concrete news. Unless this occurs before the next ECB meeting, the market may trade sideways for a few weeks.

USD/JPY Rallies on Lehman News

The USD/JPY rallied late Monday after Forex traders began to embrace the news that the financial sector would eventually pull out of this current phase of the lingering liquidity crisis. Fueled by the supportive news for Lehman Brothers, traders bought the USD/JPY in anticipation of the banking sector getting stronger over the near term.

The charts indicate that the market is poised to break out over 106.42 and trigger a further rally to at least 107.70.

GBP/USD Hits Resistance; Retracement May Attract New Buyers

The main trend remains down despite the recent rally, but the inability to break the Pound may start to attract new buyers who may try to push it through resistance at 1.9850 to a major 50% price at 1.9880.

The Pound has been firm against the Dollar as traders have expressed support in the Bank of England’s decision to leave rates unchanged at 5%.

Look for a retracement to 1.9650 before new buyers step in to support the next rally.

Swiss Franc Reverses on Close

For the past two weeks, the USD/CHF has been trading lower as the value of the Swiss Franc has been firming in anticipation of an interest rate hike later in the year.

Early last week, a report came out of Switzerland indicating the presence of inflation. On Monday another report citing a low level of unemployment put more pressure on the USD/CHF. The odds are shifting that the Swiss central bank will raise rates later in the year.

Late in the trading session, a short covering rally put the market higher on the day. This technically based action suggests the potential for a move back to 1.0335. On the downside, the target remains 1.0130.

Bank of Canada May Raise Rates 50 Basis Points

The USD/CAD continued its strong rally as traders are still considering the possibility of a 50 basis point cut by the Bank of Canada. At this time, financial market traders are pricing in a minimum 25 basis point cut. One more weak economic report will most likely cause the BoC to cut rates 50 basis points. Traders are considering this scenario and are unwilling to let up on the long side of the USD/CAD. Be careful buying up here as this is still a retracement zone. Be prepared to go long following a substantial corrective break.

Australian Dollar Could Not Make a New 25 Year High; Changes Trend to Down

In a surprise move, the Australian Dollar failed in its attempt to make a new 25-year high and sold off late in the session. The down move crossed the last swing bottom and turned the main trend down. Based on this action, look to sell the first rally.

Traders cite rumors that the Reserve Bank of Australia has lightened up its tone and may not raise rates as suggested last week. Be careful trading the long side as the surprise change in trend to down may trigger a sharp break, as protective stops are likely to be hit. The action also indicates the lack of buyers as the reason for the break rather than new sellers.

NZD/USD Falls Sharply Lower

The NZD/USD is selling off in anticipation of another interest rate cut by the central bank. Citing weakness in the economy especially in the housing sector along with weak employment numbers, new shorts have been pushing this market lower.

The charts indicate a move to .7536 is likely over the near-term. Look for resistance to sell at .7742.

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