Another day, another oil record.

Oil easily pushed past $145 Thursday morning after traders calculated that the already weak dollar has further to fall after the European Central Bank increased a key interest rate by a quarter point to 4.25%.

Oil rose as much as $2.28 to $145.85 per barrel -- an all-time high -- before easing back slightly to trade at $144.40 at mid-day.

Oil tends 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, it's important to note that the dollar/oil correlation is not perfect: there have been instances in which the dollar fell and oil fell.

These days, European Central Bank President Jean-Claude Trichet isn't too popular in currency market circles, if one trader is any indication.

Trichet, a legendary inflation hawk, campaigned for and secured a quarter-point interest rate increase Thursday, to 4.25%, in the ECB's key, short-term interest rate, the refinance rate. Many economists thought Trichet's action was premature, despite Europe's 3.7% annualized inflation rate, and that it could spell further economic slowing Europe. Unbowed, Trichet plowed ahead.

With the above as a backdrop, many currency traders, Andrew Resnick among them, plowed ahead with euro-long trades on the calculation that a higher interest rate for the euro will cause the euro to rise. Resnick went long with the euro in the euro-dollar currency pairing.

But then what did Trichet do? He stated at the regular post-ECB rate decision press conference that he has "no bias" and that "we have no pre-commitment" to raise rates further - - signaling that one interest rate increase may be enough, Bloomberg News reported.

The result? The euro plunged versus the dollar after his comments: it fell 1.2 cents - - a large price move in the currency market - - to $1.5758 Thursday morning.

And with it plunged Resnick's profits for the day. All his trades were stopped-out for losses.

'Trichet is making many friends among traders'

"Trichet," Resnick said, "isn't making many friends among traders, and probably not among business executives and economists as well." Resnick followed his evaluation of Trichet's social standing with several candid and frank, descriptive, colorful comments about the ECB president that can't be published here. Suffice it to say that Resnick is not happy with Trichet's two-step.

In a move that surprised almost no one, the European Central Bank increased its key interest rate, the refinance rate, a quarter point to 4.25%. The increase brings the refinance rate to its highest level in seven years.

The currency market, which for the most part had already factored-in the ECB rate increase, did not react initially following the decision. The euro was virtually unchanged versus the dollar at $1.5882.

The other major currency pairings also held their ground. The dollar was unchanged against the pound at $1.9884 and the dollar rose slightly, up 0.10 yen to 106.25 yen, versus Japan's yen.

Economist: Trichet 'jumped the gun'

London-based economist Mark Chandler told BloggingStocks Thursday the ECB's decision was no surprise, but that doesn't decrease his disappointment with the ECB's stance.

"I afraid I'm going to really disagree with this one. I understand where [ECB President Jean-Claude] Trichet is coming from, but he's jumped the gun from my perspective. He could have waited another quarter," Chandler said. "There's a real concern now he's going to throw Europe into a recession like America, and if the dollar continues to fall against the euro, his rate increase won't lower inflation all that much. I don't like that bargain at all."

Let's just say that if the Dow Jones Industrial Average on Thursday closes down 200 points, we'll call it a moral victory. The Dow Wednesday closed down 166.75 points to 11,215.75.

"What was that famous Bette Davis line about a bumpy night? Well, Thursday could be a bumpy day," economist Peter Dawson told BloggingStocks Wednesday.

Thursday could be very bumpy for the stock market because a series of data points -- all expected to be negative -- are converging at a traditionally difficult time of the year for the market - the start of summer.

Three data points of significance

First up is the European Central Bank's interest rate decision at 7:45 a.m. EDT, at which the bank is expected to increase its key, short-term interest rate, the refinance rate, by a quarter-point to 4.25%. The ECB is trying to check inflation, Dawson said, but it may end up hurting the dollar. If the markets believe the already-weak dollar will fall further, that will increase commodity prices, including oil, "which will not be good news for stocks," he said.

So much for consensus building.

That was how one currency trader characterized the present mood in the currency markets regarding the European Central Bank's upcoming Thursday July 3 meeting to discuss interest rates and monetary policy.

"Initially there was talk that [ECB President Jean-Claude] Trichet would make a concession to the doves, and hold off raising rates for this meeting, but now the belief pretty much is that they'll raise rates a quarter point to 4.25%," currency trader Andrew Resnick said Monday. Resnick added that he is short with the dollar in the euro-dollar and British pound-dollar currency pairings.

European inflation is running at a 3.7% annualized rate, and trending up, Resnick said, and "a 4% refinance rate just doesn't look like it can cut the mustard and contain inflation the way Trichet wants inflation contained." If the ECB increases the refinance rate -- its key, short-term interest rate -- it would be the bank's first increase in a year.

It's a European anti-inflation campaign that will require boldness, creativity, and patience.

That was how one economist described a potential monetary policy tack by the European Central Bank (ECB) for the quarters ahead.

London-based economist Mark Chandler told BloggingStocks that typically, a central bank will increase interest rates to fight inflation. Paradoxically, he's not recommending that the ECB do that now.

"It is a bit of a paradox, but if the ECB raises interest rates it may have the effect of, in fact, increasing inflation," Chandler said. (Euro-zone inflation is presently running at about a 3.7% annualized rate -- well above the ECB 2.0% limit, according to Eurostat.)

Contain commodities prices, contain inflation

Here's how an interest rate hike may hurt inflation's cause: a rate hike would put the euro, once again, in a superior investment position versus the U.S. dollar, causing the already-weak dollar to fall more, Chandler said. As the dollar continues to fall, commodity prices -- including oil -- will continue to rise, as investors seek to preserve purchasing power of the decreased value of dollar-denominated commodities, and as a general inflation hedge.

The Federal Open Market Committee issued its decision on interest rates Wednesday. It kept rates unchanged as expected but increased the hawkishness of the accompanying statement. It maintained its credentials on combating inflation but was careful not to cause any trauma to the financial markets that would require reversing this position. If this were to occur, the Fed would lose credibility.

The Fed wants to maintain its credentials on inflation control. This is necessary for it to protect the dollar from an uncontrolled spiral downward and an increase in core inflation. However, there is very little that the Fed can do to limit total inflation in the short term. The current inflation is really being primarily driven by the rise in oil prices. This is being caused primarily by the increase in demand in emerging markets, such as China and India. Fed policy has little effect on this. Oil prices rose throughout the last Fed tightening cycle despite the rise in the yield on short-term Treasury Bills.

Oil actually began its rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

The European Central Bank's president has 'clarified' earlier comments on the continent's monetary policy by stating that interest rates may, or may not, rise in the months ahead.

"I said that we could increase rates by a small amount in order to secure a solid anchoring of inflation expectations,"' ECB President Jean-Claude Trichet told the European Parliament in Brussels Wednesday, Bloomberg News reported. "I didn't say that we could envisage a series of increases. That being said, of course we never pre-commit."'

Earlier this month, on June 5, Trichet said the ECB might raise its key short-term interest rate, the refinance rate, by 25 basis points, to 4.25% in July to contain rising inflation in Europe. Inflation is currently running at a 3.7% annual pace, according to Eurostat, the European Union's economic statistics office, well above the ECB's 2% limit. (pdf)

Trichet dispels multi-hike chatter

During his July 5 comments Trichet did not rule out multiple interest rate increases, which the currency markets interpreted as a signal that at least one interest rate increase was ahead, possibly more, and the markets bid-up the price of the euro. On Wednesday, Trichet sought to dispel that notion, while at the same time letting the markets know that no rate decision has been made.

Still, the euro rose about one-half cent against the dollar Wednesday to $1.5645, although it should be noted that the currency markets were also responding to anticipated stand-pat stance on interest rates by the U.S. Federal Reserve. And this afternoon, the Fed, as expected, kept its key, short-term interest rate the same at 2%, while also saying the balance of risks had shift to inflation containment from slowing economic growth / economic recession.

Are the days of wine, roses and interest rate cuts over? The answer for now seems yes.

In a statement released today, the Federal Open Market Committee said it decided to keep its target for the federal funds rate at 2% because data indicates that labor markets have soften further and financial markets remain under stress. Moreover, the credit crunch, the lousy housing market and rising energy prices are "likely to weigh on economic growth for the next few quarters." No kidding.

The FOMC's decision, which comes amid growing fears about the outlook for inflation, should not have come as a shock to investors. Federal Reserve Chairman Ben Bernanke and other top bankers have hinted for months that the days of wine, roses and interest rate cuts would be coming to an end. In fact, the market seemed to have already absorbed the market. The major stock market averages barely budged after the announcement was issued.

Mortgage applications decreased 9.3% for the week ended June 20, 2008, the Mortgage Bankers Association announced Wednesday.

The Mortgage Bankers Association's composite index of applications declined to 461.3, on a seasonally-adjusted basis from last week's 508.4. Compared to a year ago, the composite index is down 25.3% on an unadjusted basis.

Also, the Refinance Index decreased 12.1% to 1,212.2 from 1,378.6 the previous week and the seasonally adjusted Purchase Index decreased 7.4% to 333.4 from 360.2 one week earlier.

Mortgage rates dip

Meanwhile, the average rate for a 30-year fixed loan decreased slightly to 6.39% from 6.57% the prior week. The average rate for a 15-year fixed mortgage decreased to 5.95% from 6.14%.

Former U.S. Federal Reserve Chairman Alan Greenspan believes financial market turmoil that disrupted the bond market and created liquidity concerns may extend into 2009, Bloomberg News reported Tuesday.

However, Greenspan said the Fed's efforts in March to revive credit have reduced instability. "Things do at this particular stage look a little bit better," Greenspan told Bloomberg News via a conference call, but added that financial doldrums are likely to linger a "good number of months or into next year."

Further, when asked if the U.S. economy was in a recession, Greenspan said, "We are on the brink," Reuters reported Tuesday.

Greenspan's remarks occur one day before the now Ben Bernanke-led Fed announces it interest rate decision, on Wednesday at 2:15 p.m. EDT. The Fed is widely expected to keep interest rates the same, while in its accompanying statement also striking a balance between concern over rising inflation and a pronounced economic stall.

The dollar is on-pace to record a large weekly decline Friday -- undoing last week's gains against the euro and pound -- as traders and analysts debated the likely next step for the U.S. Federal Reserve and European Central Bank.

The dollar traded at about $1.5637 to the euro Friday at mid-day, which would represent a 3-cent decline for the week, if it maintains that level by the New York close at 5 p.m. The dollar also traded at $1.9760 to the British pound, also about a 3-cent loss for the week.

Currency trader Andrew Resnick told BloggingStocks Friday concerns about rising inflation in Germany and financial service losses in the United States have caused a sentiment adjustment in the often-volatile currency markets.

A shift in sentiment

"Last week, the debate was structured around rising inflation in the U.S. and how long the Federal Reserve could hold-off before raising interest rates. That was bullish for the dollar," Resnick said. "But this week we've seen a reversal. The talk now is about [European Central Bank President Jean-Claude] Trichet beating [Fed Chairman Ben] Bernanke to the punch on interest rates, and that put a lot of traders in euro-buy mode." Resnick added that he is presently flat, or has no open currency trading positions.

Mortgage applications decreased last week, as an increase in borrowing costs discouraged mortgage refinancing activity, the Mortgage Bankers Association announced Wednesday.

The Mortgage Bankers Association's composite index of applications declined 8.7% on a seasonally-adjusted basis to 508.6 from last week's 557.1. Compared to a year ago, the composite index is down 21.3% on an unadjusted basis.

The Refinance Index decreased 15.0% to 1,378.6 from 1,622.1 the previous week and the seasonally adjusted Purchase Index decreased 4.3% to 360.2 from 376.2 one week earlier.

Mortgage rates rise

Meanwhile, the average rate for a 30-year fixed loan rose to 6.57% from 6.24% the prior week. The average rate for a 15-year fixed mortgage increased to 6.14% from 5.78%. Also, the share of applications that involved a refinance declined to 37.4% from 39.8% one week earlier.

The futures markets are predicting a stand-pat policy on interest rates by the U.S. Federal Reserve when it meets next week, according to The Wall Street Journal [subscription required]. Even so, some economists say investors should not feel overly emboldened by the futures outlook.

"I still put the odds of Fed rate increase at 30%," economist Glen Langan told BloggingStocks Tuesday. "A stand-pat policy is not guaranteed. Not hardly."

Langan's case for a rate hike: core inflation increasing in the U.S., commodity prices increasing both domestically and internationally, and a need to support the dollar -- the latter of which, via its decline, has increased inflation via price increases in dollar-denominated international goods.

Too many rate cuts in 2008?

U.S. producer prices rocketed a seasonally-adjusted 1.4% in May, the U.S Labor Department announced Tuesday, as energy and food prices continued to increase wholesale costs at an alarming rate.

Economists surveyed by Bloomberg News had expected the April 2008 PPI rate to increase by 1.0%.

The core rate, which excludes food and energy costs, increased 0.2%, the Labor Department said, inline with the Bloomberg News estimate.

For the past 12 months, producer prices have increased 7.2% and the core rate has risen 3.0%. Also, the core intermediate PPI - a benchmark, leading indicator of inflation and one the U.S. Federal Reserve monitors closely, increased 2.0% in May 2008 -- its biggest increase since 1980.

Economist David H. Wang told BloggingStocks Tuesday "PPI inflation is now way too high. The Fed's period of interest rate accommodation ends with this report."