The U.S. dollar (USD) gained some ground against the other major currencies on Monday after falling last week due to poor economic data. The Australian dollar (AUD) however has risen to a three-month high due to its increasing yield attractiveness and market expectations that the Reserve Bank of Australia is set to raise rates as early as March due to rising inflation. Interest rates are currently already at an 11-year high and with no signs of the economy cooling are expected to continue to climb.
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The Riksbank recently raised interest rates to 4%, against expectations, sending the Swedish krona soaring higher.

The Swedish central bank explained that it has raised the interest rate by 25 basis points to combat rising inflation, adding that there were risks linked to slower economic activity and financial market turbulence.

The bank has kept its options open, by explaining that future monetary policy decisions will be based on data that is released, but did advise that interest rates are expected to remain steady for this year.

The move saw the Swedish krona rise from 6.4275 from a price of 6.4785 prior to the news release.

Often, investors get so caught up with how much money they expect to make in their portfolio that they forget about protecting what they already have. As an investor, your first priority should be to protect your capital, once that’s sorted out you can focus on putting your money to work for you.

Protecting your property or privacy is a natural instinct. There are many things we do as individuals to protect our property, but one thing very few people do is protect the value of their portfolio. We put our money in the bank or in a safe deposit box, without a second thought to how inflation and market risks will affect its value.

Market risk is a risk you take when you invest in the market. If the particular market you have invested in (stocks, real estate, bonds etc.) crashes, the value of your investment will drop. This risk can be reduced by spreading your money around in different markets, this way you reduce the exposure of your portfolio to any one market. If one or two markets experience a crash, the value of your portfolio will suffer less.
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The Euro has been pushed upwards by chart driven Forex investors following the upward trend and also by Forex investors re-evaluating their interest rate expectations for the region and buying more Euro’s to invest in European assets.

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.
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Expectations continue to build that the Federal Reserve will pause its rates tightening cycle in August, this will result in Forex traders cutting their long USD positions.

The latest release of minutes from the Federal Open Market Committee meeting (FOMC) revealed that Fed officials are uncertain about the future interest rate direction and are concerned about short term inflation.

Forex Investors reacted to the release of minutes from the FOMC by continuing to reduce their USD holdings, this saw the Euro rise to a high of 1.2650 USD overnight from 1.2590.
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The US Federal Open Market Committee unanimously decided to raise interest rates by another 25bp during last week monetary policy meeting, taking the fed funds rate to 5.25%. More interestingly, the statement language was a notch more dovish than expected. While the FOMC does not promise anything for the August meeting, the overall message is still that near-term monetary policy remains data dependent, the FOMC is still vigilant on inflation and has retained its tightening bias.
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The Czech central bank (CNB) kept interest rates unchanged last week for the eighth consecutive month, leaving its key policy rate at 2.00%. The decision was broadly expected, as inflation is still well contained. However, we think a restart of the tightening cycle is moving closer.
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As broadly expected, the Polish central bank’s (NBP) Monetary Policy Council (RPP) last week decided in favour of unchanged interest rates, keeping the key policy rate at 4.00%.

The decision to keep rates on hold should clearly be seem in the light of the fact that inflation remains very low - below 1%. That said, the timing of the next rate hike has clearly been brought forward, mainly due to the following circumstances:
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The Slovak central bank (NBS) board meeting ended without any changes leaving the key policy rate at 4.00%. This was broadly expected, especially given the 50bp hike at the May monetary policy meeting.

Today’s decision probably suggests an NBS that is biding its time and waiting for more macro-data on the economy, especially inflation, before moving interest rates.
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China’s economy will grow by 10.3 percent in the first half of 2006, then slow marginally for a full-year expansion of 10 percent, the central bank said in a new report.

At the same time, inflation will climb slowly, registering 1.3 percent in the first six months of the year and 1.7 percent for the 12 months, according to the report, from the People’s Bank of China’s research bureau.

The forecasts, released over the weekend and published in the Beijing Morning Post on Monday, come despite a stream of government measures aimed at slowing the economy, following growth of 10.3 percent in the first quarter.
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The Swedish central bank has said it had decided to hike its leading interest rate by 0.25 percentage points, taking the repo rate to 2.25 percent to help keep a lid on inflationary pressures.

The Riksbank’s goal is to hold inflation to less than 2.0 percent. Inflation has risen over the past year and stood at 1.6 percent in May, but was projected to rise further over the next two years, the bank noted.

“To ensure an inflation rate close to target and contribute to a balanced development of the real economy, monetary policy should become gradually less expansionary,” the bank said Tuesday, motivating its decision.
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The USD extended losses on Wednesday after a higher-than-expected reading of U.S. inflation for May did little to dispel uncertainty about interest rate increases beyond an expected hike in late June.

After seven consecutive sessions of gains in the dollar against the Euro, traders trimmed their positions after the Consumer Price Index data cemented the chances of a June Fed rate hike but shed little light on policy moves beyond that.
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British 12-month inflation rose to 2.2 percent in May from 2.0 percent in April, lifted by soaring domestic energy bills and rising motor fuel prices, official data showed.

May’s figure breached the Bank of England’s government-set target of 2.0 percent — and was the highest reading since October 2005 when it stood at 2.3 percent.
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New Zealand’s central bank has kept its official interest rate steady at 7.25 percent despite slowing economic growth, citing a worse-than-expected outlook for inflation.

Rising oil prices and a declining New Zealand dollar (NZD) is expected to see inflation rise to 3.9 percent this quarter, Reserve Bank governor Alan Bollard said. Earlier forecasts had seen inflation peaking at 3.4 percent.
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To the surprise of us and almost everybody in the financial markets, the Central Bank (CB) raised its main policy interest rate by 175 bps to 15%. The average expectation for the rate increase in the market was around 50-75 bps, while we were not expecting anything more than 50bps.

In the accompanying short note, the CB said that the annual inflation shifted above the path that is compatible with the year-end inflation target of 5%, following very high inflation readings in April and May. The CB also acknowledged that the increases in the Forex rates due to the turmoil in the financial markets could temporarily push the annual inflation rates higher than its current levels.
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