The dollar rose to its highest level in more than a week Monday morning on talk leaders at the G-8 summit in Japan will support the currency in an attempt to halt rising commodity prices.

The dollar strengthened about one-half cent versus the euro to $1.5629 and about 1 cent versus the British pound to $1.9659 in Monday morning trading. The dollar also rose about one-half yen to 107.66 versus Japan's yen.

Ian Stannard, a senior currency strategist at BNP Paribas SA (NASDAQ: BNPQY), France's largest bank, told Bloomberg News Monday that support for the dollar in the form of verbal invention continues, driven by the thesis that a stronger dollar, globally, is in everyone's interest.

Many economists agree that a falling and weak dollar has been a factor in rising commodity prices. Oil and other commodities tend to rise when the dollar falls as investors / traders seek to preserve purchasing power of the decreased value of dollar-denominated commodities by bidding their price up. However, economists differ regarding the extent of the weak dollar's commodity-inflation impact, with some arguing it is only a mild factor.

'Actions speak louder than words'

Further, economist Peter Dawson told BloggingStocks Monday, dollar bulls should not feel too emboldened by a verbal stance by the G-8.

To paraphrase Mark Twain, if you don't like the monetary policy climate in the world's major economies, wait awhile.
Monetary policy, historically the super oil tankers of the international finance world -- slow to get in motion, with only gradual course adjustments -- have in recent times approximated quicker responses typically found elsewhere in the markets.

Up until about a week ago, the mantra was lower interest rates, liquidity to guard against the credit squeeze/crisis, with a bias toward stimulating economic growth. For example, economists and analysts generally expected the European Central Bank to (finally) lower its benchmark, short-term interest rate to stimulate the euro-zone's slowing economy.

But then last week the notoriously hawkish ECB President Jean-Claude Trichet became notoriously overt: he said the ECB would likely increase interest rates at its next meeting to check the continent's inflation rate, which like the U.S.'s, is rising due to sky-high oil prices.

Then on Monday, U.S. Federal Reserve Chairman Ben Bernanke said he'll "strongly resist" any increase in inflation expectations, Bloomberg News reported. The markets interpreted Bernanke's comments as a sign the Fed will seek to both quell inflation and limit a further decline in the dollar -- the latter itself a source of rising commodity costs and inflation. Bernanke's comments caused the dollar to strengthen Monday against the world's other major currencies -- a strengthening that continued through Tuesday afternoon. (Still, traders are reluctant to declare it a dollar rally, given the dollar's many, prior, false break-outs.)

The European Central Bank and the Bank of England Thursday each kept their key, short-term interest rates the same, at 4% and 5%, respectively, the banks announced.

Economists surveyed by Bloomberg News had expected both the ECB and BOE to maintain current interest rate levels.

Also, in their previous meetings, both the ECB and BOE kept their benchmark interest the same at 4% and 5%, respectively. The BOE's last rate cut occurred on 10 April 2008, when it lowered its key rate by 25 basis points to 5%.

In contrast, since September 2007 the U.S. Federal Reserve has lowered its key, short-term interest rate 5 times, or by 325 basis points, to 2% from 5.25%, attempting to jump-start a U.S. economy dragged down by its worst housing slump in a generation. Given the extensive monetary stimulus buy the Fed, many economists now expect it to at least take a pause in its rate cut cycle, with Fed Chairman Ben Bernanke recently signaling his concern about rising inflation and the decline in the U.S. dollar.

Inflation in Europe's euro-zone accelerated in May 2008, as the rising price of oil took its toll on prices at the consumer level.

Inflation increased to a 3.6% annual rate in May 2008, up from a 3.3% annualized rate in April 2008, EuroStat, the European Union's economics statistics office, announced Friday (pdf). It was the highest year-over-year inflation increase in 16 years.

Economists surveyed by Bloomberg News had expected euro-zone inflation to register a 3.5% annual pace in May 2008.

The European Central Bank's official inflation target is below 2%. The ECB has failed to keep inflation below this level for 10 consecutive years.

Further, although inflation had trended up above 3% in recent months, economists had argued that inflation still was not high enough on the continent to rule-out a reduction in short-term interest rates.

To jump-start the U.S. and regional economies, the U.S. Federal Reserve has cut short-term interest rates by 325 basis points to 2% since September 2007, while the Bank of England has cut its key rate three times to 5%. Meanwhile, the ECB has kept its key rate the same, at 4%, with ECB President Jean-Claude Trichet repeatedly underscoring the risk to the euro-zone economy from high-oil-cost-driven rising inflation.

Hence, May 2008's accelerating inflation may very well convince the ECB to not only maintain interest rates at current levels, but raise rates as 2008 progresses.

Economic Analysis: Another negative data point for both regional and global growth, as rising euro-zone inflation gives more fodder to the ECB hawks to maintain short-term interest rates at current levels. Further, given ECB President Trichet's inflation control penchant, the odds of a rate cut stand at about 10-20%: an ECB rate freeze is not what the west needs to stimulate demand, but the ECB is not likely to budge, unless euro-zone GDP growth slows considerably in Q3 2008.

Could ECB President Jean-Claude Trichet be compelled to modify his legendary hawkish stance regarding inflation?

He might, if sentiment against the ECB inflation target continues to mount. Bloomberg News Tuesday quoted London-based Morgan Stanley co-chief economist Joachim Fels as concluding that the ECB's goal of lowering inflation below 2% as unachievable and not credible. "The ECB's keeping up a fiction," Fels said, adding that the ECB should adjust the target.

As part of an effort to jump-start a U.S. economy slowed to a crawl by the nation's worst housing recession in more than 15 years, and to prevent a global economic slowdown, the U.S. Federal Reserve has cut short-term interest rates by 325 basis points to 2% in the past year. Further, to stave off a potential regional and global slowdown, the Bank of England has cut its key rate three times to 5%.

The dollar bulls have been vanquished again.

For the fourth time since the Economic Stimulus Act of 2008 was passed in February 2008, a nascent dollar rally has failed.

In Friday afternoon trading, the dollar was poised to record a 3-cent decline versus the euro for the week, to about $1.5776. The dollar has also fallen about 3 cents versus the British pound to $1.9788, and about 1.2 yen to 103.28 versus Japan's yen.

The kindling for a rally certainly existed earlier in the week: the prospect of 'the beginning of the end' of the worst of the U.S. housing market's troubles, and an interest rate decrease by both the Bank of England and the European Central Bank had emboldened dollar bulls.

Are the world's major central banks signaling an end to interest rate cut cycle?

Officials from three of the four major central banks - - all except the Bank of Japan - - have recently signaled their concern about rising inflation stemming from rate cuts implemented to stimulate demand following the credit crisis, Bloomberg News reported Friday. The U.S. Federal Reserve, Bank of England, and European Central Bank have commented, in various phraseologies, their concerns about prices and business costs.

Economist David H. Wang told BloggingStocks investors/traders can ignore comments out of the ECB, but not the Fed's or the BOE's - - which translates to at least a rate cut pause.

"[ECB President Jean-Claude] Trichet has been on the wires commenting on the need to contain prices, but he's been doing that since, I think, 1962, so ignore that," Wang said. "But the Fed comment blitz we had earlier this week and the Bank of England comments about rising prices I think are clear signals of a rate cut pause. The central banks have implemented enough monetary stimulus, for now."

U.K. home repossession claims by mortgage lenders increased 16% from a year ago to their highest level since the early 1990s, Bloomberg News reported Friday.

The U.K.'s Ministry of Justice said possession claims, the first step in the foreclosure process, increased to 38,688 in Q1 2008, from 27,530 in Q1 2007, Bloomberg News reported.

Anglo-American housing slump

London-based economist Mark Chandler told BloggingStocks Friday the large foreclosure rise indicates that the air is easing out of the housing balloon, and that the housing correction that began in the United States, is "clearly washing shore in the U.K."

The European Central Bank and the Bank of England Thursday each kept their key, short-term interest rates the same, at 4% and 5%, respectively, the banks announced. Economists surveyed by Bloomberg News had expected both the ECB and BOE to maintain current interest rate levels.

In its previous meeting, the ECB had kept its benchmark interest the same at 4%; meanwhile, the BOE lowered its key rate by 25 basis points to 5% from 5.25% on 10 April 2008.

In contrast, the U.S. Federal Reserve has lowered its key, short-term interest rate five times, or by 325 basis points, to 2% from 5.25%, as it attempts to jump-start a U.S. economy dragged to near-stall levels by its worst housing slump in a generation.

Further, for at least the time being, the ECB and BOE do not appear to be concerned about the euro's and the pound's steady, two-year rise versus the dollar. The euro traded at $1.5383 and the pound at $1.9583 in Thursday morning trading; each is about 4% off its 2008 highs.

The dollar rallied to a 5-week high Thursday on the belief the U.S. Federal Reserve will at least pause in its interest rate cutting cycle, as it evaluates the impact of both monetary and fiscal policy stimulus on the sluggish U.S. economy.

The dollar rose more than 2 cents versus the euro -- a large move in the currency market -- to $1.5440 on Thursday at mid-day. The dollar also gained against the world's other major currencies, rising about 2 cents to $1.9730 versus the British pound, about 1.7 cents to $1.0510 versus the Swiss franc, and about 1 yen to 104.50 yen versus Japan's yen.

Dollar rally 'may have legs'

Further, unlike previous fits-and-starts regarding earlier dollar moves higher, independent currency trader Andrew Resnick told BloggingStocks Thursday this dollar rally "may have legs" due to a potential change in fundamentals, in the dollar's favor.

That ECB trial balloon concerning a possible interest rate increase -- as opposed to an interest rate cut -- may end up being more than just a trial balloon, if Europe's inflation ramps up.

A day after ECB officials signaled that interest rates may have to rise to stem above-expectation inflation on the continent, Europe's service sector growth unexpectedly accelerated in April 2008, Bloomberg News reported Wednesday, suggesting that economic activity may be stronger than initial 2008 euro-zone forecasts.

Europe's service sector index as measured by the Royal Bank of Scotland, which includes a wide swath of industries from airline to financial services, rose to 51.8 in April 2008 from 51.6 in March 2008, Bloomberg News reported. A reading above 50 indicates expansion.

London-based economist Mark Chandler told BloggingStocks Wednesday that the unanticipated growth, combined with other positive factors, should forestall any ECB rate cut in the near future, but will not necessarily lead to an outright rate increase.

"Right now there still are a number of positives that suggest continued euro-zone growth. Employment growth is good, wage growth is adequate, and business-to-business spending is holding up fairly well," Chandler said. "That suggests adequate growth heading into the third quarter, and when you add rising inflation, it's a different economic picture than what you're seeing in America right now."

The battle of psychologies regarding the dollar continues in the currency market.

The dollar fell to an all-time low of $1.5979 versus the euro Wednesday, after an E.U. inflation report indicated accelerating inflation on the continent, reducing the likelihood of a European Central Bank interest rank cut at its next meeting.

Further, a below-consensus, March 2008 U.S. housing stats report and an in-line March 2008 U.S. inflation report also weighed on the dollar: each means that the U.S Federal Reserve will not feel inordinate pressure to pause in its interest-rate-reduction cycle to stimulate the anemic U.S. economy. That's dollar bearish, because, all other factors being equal, money tends to flow to higher-interest-rate currencies and away from lower-interest currencies.

The European Central Bank Thursday kept its key, short-term interest rate -- the refinanced rate -- the same at 4%, the bank announced.

The ECB said its most recent data confirmed the existence of strong, short-term upward pressure on inflation. The bank went on to say that Europe is "experiencing a rather protracted period of temporarily high annual rates of inflation, resulting mainly from increases in energy and food prices." Hence, upside risks to the price stability remain, the ECB added, necessitating the stand-pat monetary stance.

Trichet is resolute

In general, economists and analysts had expected the stand-pat stance, given the acceleration of inflation in the euro-zone. ECB President Jean-Claude Trichet indicated as much in his post-ECB meeting news conference.

"We believe that the current monetary policy stance will contribute'' to bringing inflation under control, Trichet said, according to Bloomberg News. "The firm anchoring of medium- to longer-term inflation expectations is of the highest priority.''

Further, for at least the time being, the ECB does not appear to be concerned about the euro's steady, two-year rise versus the dollar. The euro rose to a record $1.5913 versus the dollar Thursday morning before paring gains to trade around $1.5830 Thursday at mid-day.

The euro is up about 33% versus the dollar since January 2006. A stronger euro makes European exports harder to sell because it raises the cost of exports as European producers increase the price of their goods to compensate for foreign currency depreciation. Some European companies, commercial aerospace giant Airbus among them, have complained that the euro's rise versus the dollar is beginning to affect their competitiveness.

The Bank of England cut its key, short-term interest by a quarter-point to 5% Thursday, according to a new release.

It was the BOE's third interest rate cut since December 2007, as the central bank attempts to counteract the impact of tighter credit and the nation's worst housing slump in more than 10 years.

The BOE said credit conditions have tightened and the availability of credit appears to be getting worse. Further, while the recent depreciation in sterling will support net exports, the bank said, the prospects for output growth abroad have deteriorated, while domestic growth has started to moderate, necessitating the additional rate cut.

Concerning inflation, the BOE said inflation rose at a 2.5% annualized rate in February 2008, above the 2% target rate. However, the bank said whether inflation will remain above or below the bank's 2% target for 2008 will depend on financial market conditions, spare capacity in the U.K. economy, and the direction of commodity prices, among other factors.

Financial eras, like social periods, are often defined by moments or epiphanies when decision makers and/or citizens realized that a serious flaw/mistake/problem was occurring through time, and across space, and needed to be corrected.

The ever-incisive FT columnist and economist Martin Wolf describes one contemporary concern that's likely to be addressed: the failure to align the interests of managers with those of investors.

My BloggingStocks colleagues Peter Cohan and Zac Bissonnette have also written on the subject on several occasions in this space, and now the FT's Wolf has assembled additional data that may very well lead to public policy changes, both in Wolf's United Kingdom and in the United States.