In other news the Bank of England’s (BoE) inflation report contributed to pressure on the GBP as the Forex market reduced its interest rate expectations. The BoE expects inflation to drop below the desired 2% annual CPI over the next 12 months. The GBP fell briefly as the inflation report was released, but quickly recovered to stabilize about 1.95.

Attention will soon turn to the USD as Forex Investors await Federal Reserve chairman Ben Bernanke’s testimony to Congress, which is expected to cause further weakness to the dollar. The Forex market is expecting Bernanke to suggest that inflation is stabilizing on recent news of retail sales only showing modest gains.

The Euro fell to 1.2637 dollars in early European trading from 1.2659 dollars late on Wednesday in New York.

The USD climbed to 115.14 yen from 114.86 yen on Wednesday.

In Asian trading, the USD had extended losses ignited Wednesday after European Central Bank chief Jean-Claude Trichet raised expectations for further rate increases in the eurozone.

Despite a slight rebound, “the dollar remains under selling pressure against the euro, pound and Swiss franc”, said Derek Halpenny, senior currency economist at The Bank of Tokyo-Mitsubishi in London.

However the US currency remains stable against the yen as speculation grows of a Japanese rate hike in July, he added.

Meanwhile sterling fell against rivals after David Walton, the only Bank of England policymaker to call for an increase in British interest rates earlier this month, died suddenly late Wednesday.

“It is with great sadness that the Bank of England has learnt that David Walton, an external member of the Monetary Policy Committee, died yesterday evening, unexpectedly and after a short illness,” the central bank said in a statement. Walton was 43.

The Bank of England’s rate-setting MPC voted 7-1 to keep British borrowing costs at 4.50 percent, minutes of the June 8 meeting showed on Wednesday. It was the tenth month in a row that the BoE froze its key “repo” rate — the rate at which the central bank lends to commercial banks.

The market meanwhile turned cautious on the yen, which had risen earlier this week as Bank of Japan governor Toshihiko Fukui sparked fresh speculation of an end to the central bank’s unconventional zero-interest rate policy.

The euro was changing hands at 1.2637 dollars against 1.2659 on Wednesday, 145.50 yen (144.74), 0.6871 pounds (0.6838) and 1.5635 Swiss francs (1.5593).

The dollar stood at 115.14 yen (114.86) and 1.2370 Swiss francs (1.2355).

The pound was being traded at 1.8393 dollars (1.8456).

SOUCE: AFP

The Russian Central Bank’s move ties in with increasing signs that Middle Eastern oil exporters are also looking to diversify their reserves out of the dollar. “This is a bearish development for the dollar,” Chris Turner, head of currency research at ING Financial Markets, told the British Financial Times. “It reminds us that global surpluses are accumulating to the oil exporters,and Russia is telling us that an increasingly lower proportion of these reserves will be held in dollars. This suggests there is a trend shift away from the dollar.”

Clyde Wardle, senior Emerging Market Currency strategist at HSBC, told the paper: “We have heard talk that Middle Eastern countries are doing a similar thing and even some Asian countries have indicated their desire to do so.”

Moscow’s move was unsurprising. Russia’s $71.5billion Stabilization fund, which accumulates windfall oil revenues, is due to be converted from rubles to 45 percent dollars, 45 percent euros and 10 percent sterling. The day-to-day movements of the ruble are monitored against a basket of 0.6 dollars and 0.4 euros. About 39 percent of Russia’s goods imports came from the eurozone in 2005, against just 4 percent from the US.

The statement plays into a perception that central banks, which together hold $4.25 trillion of reserves, are increasingly channeling fresh reserves away from the dollar to reduce potential losses if the dollar was to fall sharply.
SOURCE: MOSNEWS

JON’S COMMENT
This is something I want to talk about more in the coming week. The USA was technically bankrupt in the 70’s and saved their economy by forcing everyone to buy oil on the international market using the US Dollar. But lately we have seen an increasing number of countries defying this. Iraq was one of the first to do this a few years ago with the results that we know today. Iran had plans of starting an Oil Bourse in the Middle East earlier this year which was to be dealt in other currencies and we are seeing the results of this now in the media (nuclear threat ?!?!). Now Russia has joined the ranks of other countries looking into investing more in other currencies or Gold from their massive Oil revenues. I’ll make a special report on all this soon, but my analysis is that the Dollar will be facing tough changes in the coming months/year which should result in it being even more devalued than it is at the moment.

Today’s activity appeared to be driven more by positioning rather than by orders with the dollar giving up some of yesterday’s gains. US Treasury Secretary John Snow’s comments that the US government remains ‘extremely dissatisfied’ at China’s slow pace of currency reform didn’t help the USD either. And the US Data that come out today so far seemed to have remained pretty low-key with a minor blow in weekly jobless claims numbers unexpectedly rising to 367k versus expectation of 319k. Federal Reserve chief Bernanke said that he expects an “orderly, moderate” decline in housing activity without mentioning inflation. The housing market has been a top economic performer in the past years which created a rapid appreciation in house prices empowered consumer spending and helped the economy move solidly ahead, but this might be about to change as well.

The GBP, meanwhile, also got a boost after key retail sales numbers showed that consumer spending in the country picked up in April — a factor which will advance expectations of a Bank of England rate hike before year end. Although the monthly gain was in line with expectations, the annual increase has above the forecasts of a 2.7 pct increase.

COMMENTARY
Overall after a short period of corrections and range trading, I think that the USD should resume its bearish trend in the coming weeks. What do you guys think? Do you think we have reached the bottom yet and will see the USD strengthen or is there still more downside to come?