Although I am a firm believer in USD needing to fall some more, indications are that the USD will recover and stand firm for the next couple of months at least. The USD sentiment boost came from weak Eurozone data and comments by Kansas City Fed President Thomas Hoenig. Hoenig, a non-voting member of the FOMC, said that “serious” inflation problems may lead the Fed to raise interest rates. There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.
There is also a medium to long-term danger of letting rates go lower in an environment of rising food and energy prices. In fact, the short FOMC statement gave hints that the Fed may pause rate cuts for now, something which is a big support for the US dollar.
Eurozone retail sales data released this week showed a drop of 1.6% in March compared to a year ago, the biggest fall since the data collection started in 1995. Sales fell 0.4% from the previous month. Another government report showed that German manufacturing orders fell 5% in the year ended in March, compared with an 8.9% rise the prior month. Is the slowdown due to the strong Euro or the credit implosion, I think it has more to do with the former. This will certainly cap the Euro's strength temporarily. I am sure the ECB would like to see the Euro stop climbing for a while at least.