Europe's economy grew more than forecast in Q1 2008, the European Union's statistics office announced Thursday, as Germany's economy continues to bolster the continent's results.

Euro-zone GDP increased 0.7% in Q4 2008, 0.2 percentage points above the Bloomberg News survey consensus estimate.

Germany served as the primary economic engine, recording 1.5% in the quarter – its fastest growth in 12 years, Bloomberg News reported Thursday. Meanwhile, France registered 0.6% GDP growth. Together, Germany and France account for about 50% of the euro-zone's GDP.

On a year-over-year basis, euro-zone GDP increased 2.2% in the 15-nation group. Growth in the 27-nation European Union increased 2.4%.

However, despite the upside GDP surprise from both the euro-zone and Germany, key economic officials downplayed the results. European Central Bank President Jean-Claude Trichet told Reuters the news, while positive, simply confirmed what he had expected – that Q1 2008 would be good and the ensuing period slower.

A hint by Trichet?

Economist David H. Wang told BloggingStocks Thursday there could be a glimmer of hope for those who favor an interest rate reduction by the ECB. It was unusual for the ECB's Trichet to reference slower growth after the release of a GDP report, he said. Trichet, an inflation hawk, regularly speaks of Europe's industrial capacity and price pressures in the context of GDP, Wang said.

"I don't know if this was a hint, or perhaps a mini-hint, regarding monetary policy," Wang said. The currency market shrugged-off Trichet's comments, with both the euro and British pound remaining at essentially the same levels they were earlier in the day versus the dollar, at $1.5440 and $1.9445, respectively.

Activity in the futures market may be pointing to a dollar rally, but that rally is off to an inauspicious start.

The dollar Monday fell about 1.2 cents versus the euro to $1.5522 and about 1 cent versus the British pound to $1.9570, even while a key currency futures indicator turned dollar bullish for the first time in more than 2 years.

Net dollar longs by hedge funds and other currency traders/investors totaled 21,315 on April 29, 2008, according to data released by Commodity Futures Trading Commission in Washington, Bloomberg News reported Monday; there were net dollar short positions in each of the previous 123 weeks.

One oft-repeated phrase from Washington is that there is "no magic wand" that can lower oil prices. This has proven to be comedic gold for some. But for people who find themselves paying nearly $4 a gallon to fill up their tanks, the joke is not so funny. After all, with an "oilman" in the White House, it should come as no shock that the price of a barrel of the gooey stuff has risen 5-fold since January 2001 -- hitting a record $126 today.

I noticed that every time the Fed cut interest rates, the dollar dropped in value and the price of oil rose. As I posted, this dynamic is as sure of a bet as you can get in the real world. That's why traders are shorting the dollar and going long oil. And they're betting enough on that trade to drive up the price of oil consistently. As I discussed last night on New England Cable News (NECN), the European Union decided yesterday to keep its interest rate at 4% to fight inflation. Ours is a mere 2% so investors are selling dollars and buying Euros.

This brings us to how Washington can cut gas prices fast. All it has to do is to raise interest rates. This little move requires no Congressional approval and the oval office occupant doesn't have to sign a bill. If our Fed got serious about fighting the rampant inflation it has unleashed, it would raise the Fed funds rate, the dollar would strengthen, the price of oil would drop, and you would pay less at the pump. It's as simple as that.

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.

If you are like me, you are probably getting pretty tired of reading bad housing news day after day, so today it is nice to bring you some good news on the housing market, as mortgage applications rose last week for the first time in three weeks.

According to the Mortgage Bankers Association, the week ended May 2 saw a 15.6% jump in the association's index of mortgage applications. The index takes into account both new purchase as well as refinance loans.

It is a good sign for the housing market, which is entering into its peak buying season. Perhaps this is the moment we have been waiting for, when buyers are finally ready to come back into the market and sweep up some heavily discounted houses. Home prices have been steadily falling for the past year, but signs are starting to point to a possible stabilizing early in 2009.

Bloomberg News reports that someone at the Fed has finally developed a bit of common sense --that is if you believe that the Fed's job is to fight inflationary expectations. Amazingly enough, the president of one of the Fed banks failed to repeat the standard mantra that "core inflation" is under control.

Instead, according to Bloomberg, Federal Reserve Bank of Kansas City President Thomas Hoenig said "serious" inflation pressures may compel the Fed to raise interest rates. He said that the current account deficit is a problem thanks to the weak dollar. And he argued that the combination of slowing growth and inflation is "troublesome." He observed that rising global commodity prices and higher prices of imported goods from China and other markets are pushing up prices.

And here's the kicker. Hoenig said, "Some would dismiss these rising inflationary pressures as temporary. I believe they are more serious." Hoenig thinks that the economic slowdown will be short-lived and that the Fed will need to raise rates quickly. He noted, "As the economy recovers and credit conditions improve, however, it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner."

U.S. Federal Reserve Chairman Ben Bernanke is urging both mortgage lenders and government officials to step-up efforts to help homeowners avoid foreclosure, Bloomberg News reported Monday.

Bernanke, in a speech in New York on Monday night, also underscored his preference to have lenders forgive a portions of mortgages for selected struggling homeowners, Bloomberg News reported. Bernanke qualified his remarks by stating that the proposal should be tightly targeted to avoid providing an incentive for default.

Bernanke's speech came about one week after the Bank of America (NYSE: BAC), a major mortgage lender, announced it will modify at least $40 billion in troubled mortgage during the next two years to keep customers in their homes, Bloomberg News reported Monday. The action could help as many as 265,000 homeowners, the bank said.

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.

The Bank of America, seeking approval of its Countrywide Financial Corp. takeover, announced Monday it will modify at least $40 billion in troubled mortgages during the next two years to keep customers in their homes, Bloomberg News reported Monday.

The action could help as many as 265,000 homeowners, Liam McGee, president of the Bank of America's (NYSE: BAC) global consumer and small-business banking unit, said Monday in Los Angeles at a U.S. Federal Reserve hearing on the pending purchase, Bloomberg News reported.

``No one benefits from a foreclosed home,'' McGee told Bloomberg News. ``It is bad business for banks.''

Bank of America's shares moved 10 cents higher to $38.40 while Countrywide (NYSE: CFC) gained 7 cents to $5.91 on the news in Monday afternoon trading.

Most observers believe the Fed will cut rates a quarter of a point this week and then take a "wait and see" position on the economy.

There is a very good chance that events over the last week will cause the Fed to keep interest rates just as they are.

Interruptions in oil supply have pushed the price of crude for June delivery to almost $120 a barrel. This not only means that gas prices in the US could go above $4 but the costs of petrochemicals and heating oil should continue to move up sharply.

Food prices in the first quarter went up as fast as they have at any time in the last 17 years.

The other reason that the Fed may stop cutting rates entirely is that banks are taking the savings from lower rates to build their balance sheets but are not passing those lower rates on to consumers and businesses. Much of the value of being able to borrow money for less is not being seen in the economy at all. For example, the rates for mortgages are not going down.

With inflation running at an especially high level and credit rates unlikely to get better, the reasons for the Fed cutting rates further are harder and harder to identify

Douglas A. McIntyre is an editor at 247wallst.com and writes the Ten Stocks Under $10 newsletter.

A European Central Bank interest rate cut may be up ahead.

At least that was the verdict expressed by currency traders Thursday, who drove the dollar to its largest gain in almost four years after a report indicated that German business confidence dropped in April 2008.

The dollar rallied 2 cents - - an enormous move in the currency market - - to $1.5665 versus the euro Thursday. The dollar also rallied about 1 cent versus the British pound to $1.9705 and about 1 yen to 104.37 yen versus Japan's yen.

Is the U.S. Federal Reserve about ready to pause its monetary-easing course, after next week's widely-expected 25-basis-point cut?

The emerging consensus appears to be that the Fed will, both to allow the world's most powerful central bank to assess the impact of its string of rate cuts over the past year and to save some 'interest rate ammunition,' should the U.S.'s anemic economy not show signs of a recovery in H2 2008.

If the Fed cuts key, short-term interest rates next Wednesday, it will be the Fed's seventh cut in eight months. Reductions to-date have pared a whopping 300 basis points from the Fed Funds rate to 2.25% from 5.25% in September 2007.

Help from Europe?

Given that the slowdown has been U.S.-centric, and caused in large part by the end of the U.S.'s housing boom, economist David H. Wang initially thought the Fed would be left to its own devices to jump-start demand. However, in light of recent data indicating that both German and French business confidence had dropped in March 2008, Reuters reported Thursday, Wang is now inclined to think that the European Central Bank will not stand-pat on interest rates much longer. "We're beginning to see the signs of a slowdown in Europe," Wang said. "I think another month or so of poor data and the ECB will be compelled to cut, despite some inflation pressure."

The ECB has kept its key, short-term rate, the refinance rate, at 4% throughout the Fed's easing cycle. A start of an ECB easing, Wang said, will both stimulate demand from Europe and give the Fed a window to "take a breather" and assess the impact of both monetary and fiscal policy stimulus in the U.S.

Further, the downside from the ECB maintaining a hawkish stance amid a Fed pause is very large for Europe, Wang argued. If the ECB does nothing and Europe's economy slows to a crawl, it will have missed valuable time to stimulate needed demand. Conversely, if the ECB cuts rates and later finds that growth remained adequate, it could always re-raise rates, "to keep the inflation genie back in the bottle," he said.

Oil prices have dropped slightly today following the weekly inventory report from the U.S. Department of Energy. Typically, the weekly inventory reports are able to move prices one way or the other, but this week we got mixed signals, and consequently, prices have not reacted too much in either direction.

Following the recent surge in oil prices, traders were looking for some concrete data to justify more price moves, but they were given a larger than expected decline in gasoline inventories, but higher than anticipated oil inventory numbers .

Analysts were expecting to see gasoline inventories drop by 2.1 million barrels, but the actual decline was 3.2 million barrels. Not good news for drivers that are already feeling the pain of record high gasoline prices. On the oil side, analysts had been looking to see inventories rise by 1.1 million barrels, and the actual increase was over twice that amount, at 2.4 million barrels.

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."

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

The Mortgage Bankers Association's composite index of applications declined 14.2% on a seasonally-adjusted basis to 637.6 from last week's 734.4.

The Refinance Index decreased 20.2% to 2,286.3 from 2,866.0 the previous week and the seasonally adjusted Purchase Index decreased 6.4% to 357.3 from 381.6 one week earlier.

Rates rise

Meanwhile, the average rate for a 30-year fixed loan rose to 6.04% from 5.74% the prior week. The average rate for a 15-year fixed mortgage increased to 5.60% from 5.27%.