Dollar Downdraft Relentless - But Will it Continue?

• New Zealand Dollar: NZD Retail Sales skyrocket raising expectations of another rate hike
• Euro: IP slightly above forecast
• British Pound: Flirts with 1.9900
• US Dollar: PPI and Trade on tap

Dollar Downdraft Relentless- But Will It Continue?
The dollar continued to decline against all the majors in Asia and Europe tonight as it set new 2007 lows against the euro and hovered near the 1.9900 level against the pound. The dollar index set a 26 month low as the currency markets dumped dollars ahead of the G-7 meeting this weekend in Washington. Although the meeting’s agenda does not promise to produce any market moving news the sentiment in the currency market this week appears to be strongly affected by the newly aggressive US trade policy against China. The enactment of US tariffs against China two weeks ago, along with the filing of two copyright infringement cases with the WTO have all contributed to fears that the old Sino-US environment of relatively free trade and economic cooperation may be replaced by the new reality or protectionism and political recrimination.
Although, the US policy actions up to date have been miniscule in their economic impact, speculators are taking no chances and continue to move capital out of dollars ahead of the G-7 for fear that US rhetoric may only grow more strident. The fact China is not attending this week-end’s meeting has only exacerbated those concerns. Although China is not a member of G-7 it has often been a guest attendee in the past.
The dollar political worries have only added to the euro juggernaut as the unit continues to set daily highs on its way to challenge the all time highs of 1.3644 set at the end of 2004. All of this bullish activity has occurred within an atmosphere of relatively dovish economic news. Yesterday’ s ECB press conference clearly communicated that the central bank would prefer to delay any rate hikes until June, wary that the skyrocketing euro may begin to hurt the region’s vital export sector. Tonight’s EZ Industrial Production data printed essentially in line at 0.5% vs. 0.4% expected and while the results show no deterioration of growth so far, the data from the month prior was revised downward and the data the month forward may well be worse as the effect of the higher exchange rates begins to make an impact on European manufacturers.
In short, while EURUSD express train appears to be unstoppable as traders try to gun for the stops set all time highs, any progress beyond that point may be problematic unless US protectionist rhetoric actually turns into protectionist legislation. In that case all of the dollar fears will come true and the EURUSD will rise higher as global capital flees from the greenback. If on the other hand the recent friction is simply a matter of posturing, and if the US data maintains a modestly positive slant in the upcoming week, the EURUSD rally could see some near term retracement.