Euro Drops on Trichet Comments

U.S. 10-year Treasury bond prices bounced mildly
today, after a significant decline which came yesterday. Bond prices rose off of
9-month lows today. Bonds have been falling steadily since the beginning of May,
on a string of turnaround economic reports and hawkish comments from the Fed.
Despite a huge downward revision of Q1 GDP which came out last week, bond prices
have fallen even further.

The euro sank today against the yen and the
dollar, after ECB President Trichet hinted today that no rate hikes are due in
Europe until at least the fourth quarter. Traders have been betting heavily
that the ECB would be forced to raise rates as many as two times this year to
deal with inflation, which has helped to boost the euro on the international
market. Trichet’s comments today took some of the wind out of that argument,
as traders sold the euro on the dovish comments. The yen continued to push
against both the dollar and the euro, on no apparent major Japanese news. One
possible explanation for yen strength could be the recent selloff in the
equity markets in China. Traders normally borrow the yen to buy other riskier
assets in the so-called carry trade; if the market gets too risky, traders
sell their equity and cover their yen positions, which sends the yen higher. A
global equity shakeup in early March led to a similar situation, which saw the
yen rising on equity weakness. The U.S. dollar gave up all of yesterday’s
gains against the Canadian dollar this morning.

Crude oil futures rose about 0.5% today, on
news that Turkish soldiers have moved into Northern Iraq to chase Kurdish
guerillas. Escalating tensions in the Middle East usually lead to rising oil
prices, no matter who the conflict revolves around. Natural gas futures rose
fractionally today, on more hurricane worries.

Gold futures fell fractionally, on speculation
that high interest rates around the globe will lessen demand for the precious
metal as a safety for investments. Gold usually trades inversely to the dollar
and with oil; today, neither factor seemed to influence gold trading at all.
Copper futures fell about 1% on concerns that prices are too high, and that a
recent rally has become over-extended.

Grains fell across the board today. Soybeans
fell 0.75%, wheat dropped 1.5% and corn fell 1.4%.


U.S. worker
productivity grew at 1%, compared to 1.7% last month.

John Lee

Associate Editor