The latest Ifo survey released earlier today showed only a slight dip in German business expectations. The index dropped from its 15-year high 105.9 in April to 105.6 in May, much better than most had expected. While the Ifo may slip more in the coming months, a sharp dropoff is unlikely, as most believe the German economy should gain momentum later in the year. Forbes reports:

‘The smaller than expected drop in the index will help the euro to sustain its gains and will do little to dissuade many in the market who look for the ECB to hike by 50 basis points next month,’ said Mitul Kotecha.

Read more: Euro remains firm after strong Ifo data; market awaits US data

Despite expectations of an interest rate hike by the ECB next month, the euro gained support as the OECD was only moderate in its calls for interest rate rises in the Eurozone. They said that the hikes should only be gradual and its chief economist Jean-Philippe Cotis said that the ECB should wait for second quarter GDP data before increasing rates further. The euro also gained support from Germany’s deputy finance minister Thomas Mirow when he indicated that the German economy was unaffected by the euro’s high level. Investors are currently awaiting tomorrow’s release of the Ifo survey on German business expectations. It is expected that it may show only a slight dip despite the euro’s high level.

Read more: Forex – Euro remains well-supported; market awaits German Ifo data tomorrow

Last week, the Treasury Department released its semi-annual report on exchange rates. The report stopped short of accusing China of being a “currency manipulator”. Now, Secretary John Snow is under fire from Congress. Finding China’s currency to be intentionally overvalued against the USD most likely would have triggered talks between the US and China and possibly led to economic sanctions. By not making such a claim, the Treasury has invited criticism from Sens. Charles Schumer and Lindsey Graham, who are sponsoring legislation that would impose high tariffs on China should it fail to adjust its currency. Most economists believe that the Chinese yuan is overvalued by anywhere between 15% to 40% against the dollar. The Washington Post reports:

Sen. Charles Schumer, D-N.Y., said Treasury’s report last week that declined to brand China as a currency manipulator was “a technical and legalistic dodge.” “China is a manipulator,” Schumer said at a Senate Banking Committee hearing, “and the administration is afraid to say so.”

Read more: Sens. Criticize Treasury on China Currency

Hello everyone. I’m Jimmy Atkinson, co-owner of Forex Blog. Our regular writer Adam Kritzer is away for a few weeks, so I’ll be filling in for him until then. I’ll let you know when he gets back.

In the last month, the Canadian Dollar has soared to unbelievable heights, reaching a 28-year high against its neighbor to the South, the USD. Most economists, however, believe the Canadian Dollar is overvalued. In a recent Press Conference, the President of Canada’s Central Bank insisted the Canadian Dollar’s recent run was mostly a product of speculation and does not reflect economic fundamentals. Further, many analysts expect the currency to retreat 5-10% against the USD in the coming months. Reuters reports:

“Although (U.S. dollar versus Canada) has reached a new 28-year low of 91.12 U.S. cents, the daily technical studies have been lingering at oversold extremes.”

Read More: Canada, U.S. dollars not headed to parity

The eagerly awaited semi-annual Treasury report on exchange rates has finally been released, and the results may have serious implications. Many members of Congress, among others, had been hoping the US would use the report to officially label China a currency manipulator, which would justify the use of trade sanctions and other economic penalties. Instead, while admitting it was concerned about widening economic balances engendered by China’s artificially low exchange rate, the Treasury Department stopped short of formally accusing China of currency manipulation. The report may provide the impetus to propel a bill, which would punish China economically, through Congress. The New York Times reports:

They [Senators Schumer and Graham] can be expected to challenge the Treasury report’s conclusion, but they have also kept their bill calling for tariffs on hold while watching how China responds.

Read More: China Not Manipulating Currency, U.S. Says

This week, the USD dropped to a one-year low against the Euro and an 8-month low against the Japanese Yen. It seems everyone has a different explanation for why this is happening. Technical analysts argue that the Dollar is in an upward track against the Euro, and will continue to seesaw in an upward pattern. Fundamental analysts, meanwhile, feel the Dollar’s weakness is due to narrowing interest rate differentials, which will likely decrease the willingness of foreigners to hold US assets. Economists feel the depreciation is a product of economic imbalances, and that the massive US current account deficit has necessitated a ‘correction’ in the value of the Dollar. Reuters reports:

The dollar has been under pressure since the Group of Seven finance ministers last month called on China and other emerging Asian economies to allow greater currency flexibility to help redress global imbalances.

Read More: Dollar falls to 1-yr lows as Fed approaches pause

Earlier this year, US Senators Charles Schumer and Lindsey Graham proposed a bill that would slap a 27.5% tariff on all Chinese imports, in the event that China failed to revalue the Yuan in a timely manner. After meeting with senior Chinese banking officials, however, the Senators agreed to postpone voting on the bill. This week marked another about-face, as they publicly announced that the bill would be reintroduced at the end of the year if China does not allow the Yuan to appreciate 7-10%, in a demonstration that they take US relations seriously. The Washington Post reports:

“My hope is that between now and the end of the year you will have a revaluation somewhere in the double-digit area,” said Sen. Lindsey Graham.

Read More: Senator wants China revaluation by end-2006

The European Central Bank deserves full credit for the Euro’s breakthrough to a one-year high against the USD, yet it didn’t lift a finger. Rather, the ECB all but assured investors it would raise interest rates by 25 basis points to 2.75% in June. Jean-Claude Trichet, President of the ECB, joked with investors that they have been able to predict European monetary policy with reasonable accuracy. Trichet also commented the EU’s economic recovery, which is driving inflation and necessitating the interest rate hike. Reuters reports:

The [Euro] has climbed over 3 percent against the dollar in the past month to its highest level in almost a year and to a similar comparative level on a trade-weighted basis.

Read More: ECB steps up inflation warnings, signals June

For longer than I care to remember, the U.S. and other developed nations have accused China of blatant currency manipulation and clamored for China to revalue the yuan. This has deflected attention away from Korea, which continues to intervene in forex markets. Korea’s currency, the Won, has appreciated 8% against the USD in the first four months of this year. In an effort designed to curb the Won’s rise, the Central Bank of Korea has announced it will issue more currency stabilization bonds. These bonds enable the Bank to purchase massive quantities of USD in a transaction that should theoretically depress the Won. TCS Daily reports:

It turns out that the won closely shadows the yen and has developed a similar linkage to the yuan. Therefore, little ground will be lost in terms of the pricing of export goods with Korea’s primary competitors.

Read more: Money Meddlers

In the last few months, the USD has plummeted against most major currencies, in some cases dropping to nearly one-year lows. Many analysts are predicting the USD will begin to harm certain sectors of the US stock and bond markets. Both manufacturers that import raw materials, and retailers that import finished products, will face increasing costs and lower profits. On the other hand, US companies that have significant overseas operations and/or international sales will certainly benefit from the dollar’s decline. For those of you who are skittish about investing directly in forex markets, these companies represent excellent proxies for a bet against the USD. The Wall Street Journal reports:

The Group of Seven leading industrial nations said emerging economies should let their currencies appreciate to help reduce the large trade surpluses these countries have with the U.S…

Read More: Dollar’s Slide Could Roil Stocks

The prevailing explanation for the sudden, precipitous fall by the USD is that the Fed is nearing the end of its current monetary tightening cycle, at which point interest rate differentials between the US and the rest of the world will begin to narrow. In this vein, Ben Bernanke’s hint that the Fed might end its cycle earlier than expected probably hastened the dollar’s decline. Forex traders will admittedly be watching economic indicators closely for insight into the Fed’s likely course of action. This includes data on the housing market, for the Fed could conceivably continue to raise rates as long as the housing market remains overly buoyant. Goldseek reports:

The economy grew 4.8% in the first quarter of this year. Inflation is at the upper end of the Fed’s comfort level. If we see another two months of that type of environment, it is likely they will raise rates yet again…

Read More: To Pause or Not to Pause

China caught investors by surprise last week, when it raised its benchmark interest rate for the first time in years, to 5.85%. Foreign banks applauded the move as emblematic of China’s broader effort to allow market forces to play a larger role in the economy. China must tread carefully, however, as the Yuan-USD peg severely constrains its ability to conduct monetary policy. If China’s Central Bank wishes to raise rates further (to rein in growth and inflation), it may have to allow the Yuan to appreciate at a faster pace, so as not to invite an influx of speculative capital. Reuters reports:

U.S. officials will consider all of the steps China has taken to retool its economy when assessing the nation in a semiannual report on whether U.S. trading partners manipulate exchange rates to gain unfair trade advantage.

Read More: U.S. calls China interest rate increase “positive”