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.

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."

The dollar Friday was poised to record its largest weekly gain versus the euro in three years, on a growing consensus that the U.S. Federal Reserve will increase interest rates soon to check rising U.S. inflation.

The dollar traded up about one-half cent to $1.5372 versus the euro early Friday afternoon - - a level that if sustained at the New York close at 5 p.m. EDT would give the greenback its biggest weekly gain since early 2005, Bloomberg News reported Friday.

The dollar also rose Friday against the other major currencies. The dollar increased about one-half cent to $1.9494 versus the British pound, and about sixth-tenths of a cent to $1.0476 versus the Swiss franc. The dollar was unchanged versus Japan's yen at 107.90 yen.

The dollar rose more than 1.4 cents against the world's other, major currencies Thursday -- its third large gain in four days -- after traders calculated that better-than-expected May retail sales will prompt the U.S. Federal Reserve to increase interest rates soon, possibly by late summer.

The dollar strengthened 1.4 cents to $1.5400 versus the euro, 1.7 cents to $1.9444 versus the British pound and about 1 yen to 107.92 versus Japan's yen on Thursday at mid-day.

Dollar bulls, subject to numerous false-breakouts during 2008, were encouraged by the most recent U.S. retail sales data. The U.S. Commerce Department Thursday announced that May retail sales rose 1%, double the consensus estimate of economists surveyed by Bloomberg News.

May retail sales surprises traders

Currency trader Andrew Resnick told BloggingStocks Thursday the surprisingly upbeat May retail sales report has not made him a dollar bull, but he's inching closer to it. "It's tough to form a meaningful conclusion with just one data point, but retail sales did take the dollar bears by surprise," Resnick said. "Most were expecting a sort of neutral number, but the May number was not neutral. If anything, it suggests the consumer, while cutting back, has not disappeared from the stage completely."

Still, the favorable May retail sales report was not enough to push Resnick decisively into the dollar bull camp, Fed rate increase this summer or not, and he remains flat, with no open currency positions presently. "We've been led down this dollar recovery road too many times, so for the sake of avoiding a red screen [trading losses], I'm flat," Resnick said. "What's that old saying? 'fool me once, shame on you, fool me twice, shame on me.' "

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.)

It's Uncle Ben versus the Ferocious Fundamentals.

The dollar rose more than 1.7 cents against two other major currencies Tuesday -- a large move in the currency market -- after U.S. Federal Reserve Chairman Ben Bernanke said the world's most important central bank will "strongly resist" any dip in public confidence in stable prices, Bloomberg News reported.

Traders interpreted Bernanke's comments as renewed Fed attention to oil-induced, rising U.S. inflation, and bought the dollar, sending it higher Tuesday at mid-day. The dollar strengthened 1.7 cents to $1.5477 versus the euro, 2.1 cents to $1.9540 versus the British pound, and almost 1 yen to 107.19 versus Japan's yen.

A 'dollar skeptic'

Further, although Chicago Board of Trade futures calculate a 55% chance of a Fed quarter-point interest rate increase in its benchmark rate when it meets next on August 5, currency trader Andrew Resnick remains a doubter.

The dollar plunged Friday after Morgan Stanley said oil prices could rise to $150 and after data indicated the U.S. employment rate surged to 5.5% in May.

The dollar fell one cent versus the euro to $1.5694 and about three-quarters of a cent versus the British pound to $1.9640. The dollar also declined about one half-yen to 105.55 versus Japan's yen.

A Morgan Stanley report ended what had been a mild dollar rebound over the past week. Morgan Stanley said oil prices could rise to $150 per barrel, due to Asia's likely accelerating purchase of Middle East oil exports, Bloomberg News reported Friday. Oil surged $6.54 to $134.54 per barrel in early trading Friday, on top of Thursday's large $5.49 gain.

Also Friday, the U.S. Labor Department announced that the nation's unemployment rate surged to 5.5% in May from 5.0% in April, as U.S. companies continued to cut expenses to protect profits in the face of the economic slowdown.

So much for the (latest) dollar rally

Currency trader Andrew Resnick told BloggingStocks Friday the oil/unemployment double-whammy would be tough for a strong currency to withstand, let alone the fragile dollar.

"We were experiencing a modest dollar rally, and there were signs of strengthening dollar-bullish sentiment. The Fed may raise interest rates and oil prices up until a few days ago were trending lower on the belief global oil demand will drop off. But the dollar-bulls have been defeated again," Resnick said. He added that he was presently flat after being stopped out of dollar long positions in the euro-dollar and British pound-dollar currency pairings.

Further, Resnick said the Thursday/Friday events underscores how hard it is for the market to sustain a dollar rally in the face of dollar fundamentals that have remained decidedly negative for more than four years.

"It's the old problem of the terrible twins, the U.S. trade deficit and the federal budget deficit," Resnick said. "People had talked up the ability of the dollar to gain support on [Fed Chairman] Bernanke's interest rate pause, but the fundamentals laid waste to that sentiment again," Resnick said. "Until the deficit numbers show steady improvement, and the [U.S.] economy starts to grow, it's hard to see the dollar sustaining a rally. The economy is simply too weak right now."

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.

So much for that nascent dollar rally.

The dollar fell against the world's other major currencies Tuesday after the International Monetary Fund cautioned that the U.S. housing slump still poses "serious risks" to financial markets and ZEW President Wolfgang Franz said he thought the ECB would increase interest rates in the near future, Reuters reported Tuesday.

The dollar fell 1.2 cents to $1.5649 versus the euro, about 1.5 cents versus the British pound to $1.9642, and about one-quarter yen to 104.10 versus Japan's yen.

Earlier in the day, IMF First Deputy Managing Director John Lipksy, in prepared remarks, said the IMF still sees "serious risks" to the financial market from the U.S. housing slump -- the U.S.'s worst housing decline in more than 15 years. Lipsky said the housing slump in the world's largest economy is yet to run its course.

Meanwhile, ZEW President Wolfgang Franz jolted the currency market Tuesday by saying he thought the European Central Bank would increase interest rates in the near future.

The dollar rose Monday against the world's other major currencies, despite the fact the European Central Bank's president reiterated his concern about rising euro-zone inflation, which suggests there's little chance for an interest rate cut soon on the continent.

The dollar rose about 1 cent to $1.5511 versus the euro and about 1.2 cents versus the British pound to $1.9455. The dollar also gained about one-half yen to 104.68 versus Japan's yen.

The dollar rally occurred despite the fact that ECB President Jean-Claude Trichet reiterated to BBC Radio his concern about rising inflation, and its structural impact on Europe's economy, saying that "price stability ... is the best way to have a high level of sustainable growth and sustainable job creation."

Trichet's intransigence

Despite the U.S. economic slump, which has slowed economic growth both in Europe and in other developed-world markets, the ECB, unlike the U.S. Federal Reserve, hasn't budged regarding short-term interest rates, and kept its key rate at 4%. The ECB has cited the threat to inflation posed by rising oil prices, among other factors, as the primary reason for its stand-pat policy.

Macroeconomic factors are beginning to hint about a change in the dollar's fortunes, pun intended, if a new survey is any indicator.

Still, that doesn't mean that the United States does not have work ahead to right its economic ship of state, so says one economist.

The Bloomberg Professional Global Confidence Index's dollar expectations component rose to 57.6 in May 2008 from 42.87 in April 2008, and 30.3 in March 2008. A reading above 50 indicates respondents expect the currency to appreciate in the next six months. The poll surveyed 3,447 Bloomberg terminal users.

In late Wednesday afternoon trading, the dollar rose slightly against the world's other major currencies, rising about a fifth-cent to $1.5446 against the euro, and a quarter-cent to $1.9435 against the British pound. The dollar also rose about one-half yen to 105.35 against Japan's yen. The dollar hit an all-time low versus the euro of $1.6018 on April 21, 2008. The euro has appreciated about 100% versus the dollar since 2000.

I know that last thing you probably wanted to hear this morning was that oil prices moved even higher, but that is exactly what is taking place, as oil rose as high as $125.98 and is currently trading at $125.60.

Leading the charge today is the weak dollar as investors continue to seek refuge from the falling U.S. currency in commodities -- most notably, oil. The dollar has fallen today against the euro, the British pound, and the Japanese yen. The euro was sitting at $1.5404 last night, but has moved higher today, up to a current price of $1.5466.

The market is also concerned about the upcoming peak driving season for Americans. With the season getting under way, oil prices will definitely continue to rise, and if gasoline stockpiles continue to fall, you can be sure that gasoline prices are also going to keep moving higher over the next couple of months. Will we see national averages of $4 or greater? I don't think so, but at the current rate prices are moving, nothing is out of the question right now.

The dollar rallied to a six-week high Wednesday after U.S. productivity increased at a larger-than-expected rate and sentiment surfaced that Europe's economy may have slowed considerably.

The dollar rose about 2 cents versus the euro -- a large move in the currency market -- to $1.5370 on Wednesday afternoon. The dollar also gained against the world's other major currencies, rising about 2 cents to $1.9530 versus the British poundת about 0.5 cents to $1.0555 versus the Swiss franc and about one-half yen to 104.85 yen versus Japan's yen.

U.S. productivity gives dollar a lift

Earlier in the day, the U.S. Labor Department announced that U.S. worker productivity increased at a 2.2% annual pace in Q1 2008, well above the 1.7% Bloomberg News survey consensus estimate.

Independent currency trader Andrew Resnick told BloggingStocks Wednesday the Q1 2008 productivity data, combined with a sense that the European Central Bank is behind-the-curve concerning interest rate cuts to deal with slowing economic growth, put traders in dollar-buy mode.

With the Japanese yen continuing to fall against the US dollar as well as higher yielding currencies such as the South African rand and the British pound, the question is whether the "carry-trade" is back on? If so, stocks may continue to rise.

What's the "carry trade"? It's an investment strategy with currencies, where investors borrow money in a currency with low borrowing costs (such as the yen) and then invest in higher yielding currencies (such as the rand or Australian dollar), earning the spread. If this trade is "back-on," then it shows that investors are more willing to take on some risk, boding well for a continued stock rally as well.

In a report on Bloomberg: "The currency weakened the most against the South African rand and the British pound, two favorites of so-called carry trades, as the cost of protecting bonds from default declined."

The report then spoke with a currency manager: "With stocks rising this much, it doesn't augur well for the yen," said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's second- biggest lender. "Calm is returning to financial markets, and that allows currency traders to focus on rate differentials. The Fed may not have to cut rates much further.''

Keep your eyes on the carry trade to see where the markets may be heading.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 5/2/08

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.