Plot the Japanese Yen against almost any “major” currency over the last few months (or few weeks for that matter) and you get a pretty consistent picture. Moreover, when you graph most Yen currency pairs against the S&P 500 (I like the AUD/JPY), the correlation is uncanny! Sure enough, it was reported recently that “Japan’s currency also fell the most in a week against the euro as futures on the Standard & Poor’s 500 Index rose 0.5 percent.”

This suggests that the main driver for the Yen is proximally, the demand for US equities, and ultimately, appetite for risk. “We’re seeing high-yielding currencies still rallying along with stock markets…The market is reverting to business as usual. That’s just spurring risk currencies forward,” explains one analyst. In other words, the carry trade is back, and investors are borrowing in the world’s cheapest currency (Japanese overnight interest rates are only .1%) and investing in higher-yielding alternatives. “There’s strong momentum behind this risk taking. You cannot keep your money in cash for zero returns unless you believe in deflation,” added a trader.

Experts on both sides of the Pacific Ocean are now encouraging their clients to short the Yen. “Japanese financial institutions are encouraging investors to put money into mutual funds focused on assets denominated in currencies such as the Turkish lira, South African rand and Brazilian real…Japanese investors were net buyers of 709.4 billion yen of overseas assets in the week ended July 11…” Goldman Sachs, meanwhile, has declared that the Yen is still overvalued, and “recommended investors use three-month forward contracts to sell the yen.”

There’s certainly some second-guessing taking place, especially with earnings season upon us. “Risk aversion is likely to stay prominent, given earnings announcements by companies including CIT. The bias is for haven currencies such as the yen to be bought,” insisted one analyst. In addition, Central Bank diversification has created some demand for the Yen and the Euro, but this is more of a Dollar-negative story than a Yen-positive story.

There are also signs that the Japanese economy is recovering, thanks to a pickup in exports. The fact that its economy remains so dependent on exports to drive growth certainly exacerbated the impact of the credit crisis. On the other hand, it could also magnify any recovery. “Japan’s merchandise trade surplus widened in June…to 508 billion yen ($5.42 billion) from 104.1 billion yen a year earlier. The nation’s trade performance appears to be improving, as the surplus was bigger than May’s 299.8 billion yen figure.”

Still, prices in Japan are falling (by 1.1% at last count), and there are strong concerns among economic officials that deflation could take hold. Accordingly, carry traders borrowing in Yen can rest easy, knowing that Japan is probably the least likely of any industrialized country to raise interest rates in the near-term.

Plot the Japanese Yen against almost any “major” currency over the last few months (or few weeks for that matter) and you get a pretty consistent picture. Moreover, when you graph most Yen currency pairs against the S&P 500 (I like the AUD/JPY), the correlation is uncanny! Sure enough, it was reported recently that “Japan’s currency also fell the most in a week against the euro as futures on the Standard & Poor’s 500 Index rose 0.5 percent.”

This suggests that the main driver for the Yen is proximally, the demand for US equities, and ultimately, appetite for risk. “We’re seeing high-yielding currencies still rallying along with stock markets…The market is reverting to business as usual. That’s just spurring risk currencies forward,” explains one analyst. In other words, the carry trade is back, and investors are borrowing in the world’s cheapest currency (Japanese overnight interest rates are only .1%) and investing in higher-yielding alternatives. “There’s strong momentum behind this risk taking. You cannot keep your money in cash for zero returns unless you believe in deflation,” added a trader.

Experts on both sides of the Pacific Ocean are now encouraging their clients to short the Yen. “Japanese financial institutions are encouraging investors to put money into mutual funds focused on assets denominated in currencies such as the Turkish lira, South African rand and Brazilian real…Japanese investors were net buyers of 709.4 billion yen of overseas assets in the week ended July 11…” Goldman Sachs, meanwhile, has declared that the Yen is still overvalued, and “recommended investors use three-month forward contracts to sell the yen.”

There’s certainly some second-guessing taking place, especially with earnings season upon us. “Risk aversion is likely to stay prominent, given earnings announcements by companies including CIT. The bias is for haven currencies such as the yen to be bought,” insisted one analyst. In addition, Central Bank diversification has created some demand for the Yen and the Euro, but this is more of a Dollar-negative story than a Yen-positive story.

There are also signs that the Japanese economy is recovering, thanks to a pickup in exports. The fact that its economy remains so dependent on exports to drive growth certainly exacerbated the impact of the credit crisis. On the other hand, it could also magnify any recovery. “Japan’s merchandise trade surplus widened in June…to 508 billion yen ($5.42 billion) from 104.1 billion yen a year earlier. The nation’s trade performance appears to be improving, as the surplus was bigger than May’s 299.8 billion yen figure.”

Still, prices in Japan are falling (by 1.1% at last count), and there are strong concerns among economic officials that deflation could take hold. Accordingly, carry traders borrowing in Yen can rest easy, knowing that Japan is probably the least likely of any industrialized country to raise interest rates in the near-term.

The next rate-setting meeting of the European Central Bank (”ECB”) is rapidly approaching (August 3), and analysts are stepping up to offer their opinions on the direction of EU monetary policy. At its last meeting, on July 2, the ECB voted to hold rates at the current record-low level of 1%, and all indications are that the August meeting will yield the same result.

Despite getting off to a late start, the ECB has since moved adroitly to strike a balance in its monetary policy between inflation and growth. For those that insist that its rates are still too high - especially compared to the US and UK - the ECB can counter by arguing that this way it still has some scope to lower rates, if need be. “If a deflationary spiral does become entrenched, unlike most of the other major global economies, at least the European Central Bank still has some of the interest rate tool left to fall back on,” agrees one analyst.

The ECB can also refer critics to its overnight lending rate, which are 75 basis points lower than its main policy rate. “Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate. Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate.” It is at this refinancing rate that it recently lent out a record €442 billion to banks and other financial institutions.

While the ECB “has had one eye on the exit since the start of the crisis,” it nonetheless appears to be in no hurry to hike rates - neither its overnight nor its refi rate. Jean-Claude Trichet himself has said, “The current rates are appropriate.” He even refused to rule out the possibility that rates could even fall further before policy is tightened.

According to a Bloomberg survey of economists, this won’t happen for at least a year - the fourth quarter of 2010 to be specific. After all, inflation has touched a record low of -.1%. The Eurozone economy contracted by a record 4.5% last quarter. Private sector lending growth has fallen to a record low of 1.8%. All in all, not exactly the right environment for a rate hike. There is at least one vocal inflation hawk on the governing board of the ECB who is arguing for preemptive rate hikes, but for now at least he has been silenced. “Economists at Barclays in London have forecast that Europe’s policy makers won’t begin raising rates until late 2011.”

The forex markets, meanwhile, appear to be indifferent to this whole debate, concerned not about Eurozone growth, inflation, low interest rates, not to mention political uncertainties and trade deficits. The Euro has resumed its upward rise against the Dollar, begun in March, and may not slow down until the Fed starts to tighten monetary policy.

The next rate-setting meeting of the European Central Bank (”ECB”) is rapidly approaching (August 3), and analysts are stepping up to offer their opinions on the direction of EU monetary policy. At its last meeting, on July 2, the ECB voted to hold rates at the current record-low level of 1%, and all indications are that the August meeting will yield the same result.

Despite getting off to a late start, the ECB has since moved adroitly to strike a balance in its monetary policy between inflation and growth. For those that insist that its rates are still too high - especially compared to the US and UK - the ECB can counter by arguing that this way it still has some scope to lower rates, if need be. “If a deflationary spiral does become entrenched, unlike most of the other major global economies, at least the European Central Bank still has some of the interest rate tool left to fall back on,” agrees one analyst.

The ECB can also refer critics to its overnight lending rate, which are 75 basis points lower than its main policy rate. “Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate. Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate.” It is at this refinancing rate that it recently lent out a record €442 billion to banks and other financial institutions.

While the ECB “has had one eye on the exit since the start of the crisis,” it nonetheless appears to be in no hurry to hike rates - neither its overnight nor its refi rate. Jean-Claude Trichet himself has said, “The current rates are appropriate.” He even refused to rule out the possibility that rates could even fall further before policy is tightened.

According to a Bloomberg survey of economists, this won’t happen for at least a year - the fourth quarter of 2010 to be specific. After all, inflation has touched a record low of -.1%. The Eurozone economy contracted by a record 4.5% last quarter. Private sector lending growth has fallen to a record low of 1.8%. All in all, not exactly the right environment for a rate hike. There is at least one vocal inflation hawk on the governing board of the ECB who is arguing for preemptive rate hikes, but for now at least he has been silenced. “Economists at Barclays in London have forecast that Europe’s policy makers won’t begin raising rates until late 2011.”

The forex markets, meanwhile, appear to be indifferent to this whole debate, concerned not about Eurozone growth, inflation, low interest rates, not to mention political uncertainties and trade deficits. The Euro has resumed its upward rise against the Dollar, begun in March, and may not slow down until the Fed starts to tighten monetary policy.

Plot the Japanese Yen against almost any “major” currency over the last few months (or few weeks for that matter) and you get a pretty consistent picture. Moreover, when you graph most Yen currency pairs against the S&P 500 (I like the AUD/JPY), the correlation is uncanny! Sure enough, it was reported recently that “Japan’s currency also fell the most in a week against the euro as futures on the Standard & Poor’s 500 Index rose 0.5 percent.”

This suggests that the main driver for the Yen is proximally, the demand for US equities, and ultimately, appetite for risk. “We’re seeing high-yielding currencies still rallying along with stock markets…The market is reverting to business as usual. That’s just spurring risk currencies forward,” explains one analyst. In other words, the carry trade is back, and investors are borrowing in the world’s cheapest currency (Japanese overnight interest rates are only .1%) and investing in higher-yielding alternatives. “There’s strong momentum behind this risk taking. You cannot keep your money in cash for zero returns unless you believe in deflation,” added a trader.

Experts on both sides of the Pacific Ocean are now encouraging their clients to short the Yen. “Japanese financial institutions are encouraging investors to put money into mutual funds focused on assets denominated in currencies such as the Turkish lira, South African rand and Brazilian real…Japanese investors were net buyers of 709.4 billion yen of overseas assets in the week ended July 11…” Goldman Sachs, meanwhile, has declared that the Yen is still overvalued, and “recommended investors use three-month forward contracts to sell the yen.”

There’s certainly some second-guessing taking place, especially with earnings season upon us. “Risk aversion is likely to stay prominent, given earnings announcements by companies including CIT. The bias is for haven currencies such as the yen to be bought,” insisted one analyst. In addition, Central Bank diversification has created some demand for the Yen and the Euro, but this is more of a Dollar-negative story than a Yen-positive story.

There are also signs that the Japanese economy is recovering, thanks to a pickup in exports. The fact that its economy remains so dependent on exports to drive growth certainly exacerbated the impact of the credit crisis. On the other hand, it could also magnify any recovery. “Japan’s merchandise trade surplus widened in June…to 508 billion yen ($5.42 billion) from 104.1 billion yen a year earlier. The nation’s trade performance appears to be improving, as the surplus was bigger than May’s 299.8 billion yen figure.”

Still, prices in Japan are falling (by 1.1% at last count), and there are strong concerns among economic officials that deflation could take hold. Accordingly, carry traders borrowing in Yen can rest easy, knowing that Japan is probably the least likely of any industrialized country to raise interest rates in the near-term.

Plot the Japanese Yen against almost any “major” currency over the last few months (or few weeks for that matter) and you get a pretty consistent picture. Moreover, when you graph most Yen currency pairs against the S&P 500 (I like the AUD/JPY), the correlation is uncanny! Sure enough, it was reported recently that “Japan’s currency also fell the most in a week against the euro as futures on the Standard & Poor’s 500 Index rose 0.5 percent.”

This suggests that the main driver for the Yen is proximally, the demand for US equities, and ultimately, appetite for risk. “We’re seeing high-yielding currencies still rallying along with stock markets…The market is reverting to business as usual. That’s just spurring risk currencies forward,” explains one analyst. In other words, the carry trade is back, and investors are borrowing in the world’s cheapest currency (Japanese overnight interest rates are only .1%) and investing in higher-yielding alternatives. “There’s strong momentum behind this risk taking. You cannot keep your money in cash for zero returns unless you believe in deflation,” added a trader.

Experts on both sides of the Pacific Ocean are now encouraging their clients to short the Yen. “Japanese financial institutions are encouraging investors to put money into mutual funds focused on assets denominated in currencies such as the Turkish lira, South African rand and Brazilian real…Japanese investors were net buyers of 709.4 billion yen of overseas assets in the week ended July 11…” Goldman Sachs, meanwhile, has declared that the Yen is still overvalued, and “recommended investors use three-month forward contracts to sell the yen.”

There’s certainly some second-guessing taking place, especially with earnings season upon us. “Risk aversion is likely to stay prominent, given earnings announcements by companies including CIT. The bias is for haven currencies such as the yen to be bought,” insisted one analyst. In addition, Central Bank diversification has created some demand for the Yen and the Euro, but this is more of a Dollar-negative story than a Yen-positive story.

There are also signs that the Japanese economy is recovering, thanks to a pickup in exports. The fact that its economy remains so dependent on exports to drive growth certainly exacerbated the impact of the credit crisis. On the other hand, it could also magnify any recovery. “Japan’s merchandise trade surplus widened in June…to 508 billion yen ($5.42 billion) from 104.1 billion yen a year earlier. The nation’s trade performance appears to be improving, as the surplus was bigger than May’s 299.8 billion yen figure.”

Still, prices in Japan are falling (by 1.1% at last count), and there are strong concerns among economic officials that deflation could take hold. Accordingly, carry traders borrowing in Yen can rest easy, knowing that Japan is probably the least likely of any industrialized country to raise interest rates in the near-term.

The next rate-setting meeting of the European Central Bank (”ECB”) is rapidly approaching (August 3), and analysts are stepping up to offer their opinions on the direction of EU monetary policy. At its last meeting, on July 2, the ECB voted to hold rates at the current record-low level of 1%, and all indications are that the August meeting will yield the same result.

Despite getting off to a late start, the ECB has since moved adroitly to strike a balance in its monetary policy between inflation and growth. For those that insist that its rates are still too high - especially compared to the US and UK - the ECB can counter by arguing that this way it still has some scope to lower rates, if need be. “If a deflationary spiral does become entrenched, unlike most of the other major global economies, at least the European Central Bank still has some of the interest rate tool left to fall back on,” agrees one analyst.

The ECB can also refer critics to its overnight lending rate, which are 75 basis points lower than its main policy rate. “Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate. Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate.” It is at this refinancing rate that it recently lent out a record €442 billion to banks and other financial institutions.

While the ECB “has had one eye on the exit since the start of the crisis,” it nonetheless appears to be in no hurry to hike rates - neither its overnight nor its refi rate. Jean-Claude Trichet himself has said, “The current rates are appropriate.” He even refused to rule out the possibility that rates could even fall further before policy is tightened.

According to a Bloomberg survey of economists, this won’t happen for at least a year - the fourth quarter of 2010 to be specific. After all, inflation has touched a record low of -.1%. The Eurozone economy contracted by a record 4.5% last quarter. Private sector lending growth has fallen to a record low of 1.8%. All in all, not exactly the right environment for a rate hike. There is at least one vocal inflation hawk on the governing board of the ECB who is arguing for preemptive rate hikes, but for now at least he has been silenced. “Economists at Barclays in London have forecast that Europe’s policy makers won’t begin raising rates until late 2011.”

The forex markets, meanwhile, appear to be indifferent to this whole debate, concerned not about Eurozone growth, inflation, low interest rates, not to mention political uncertainties and trade deficits. The Euro has resumed its upward rise against the Dollar, begun in March, and may not slow down until the Fed starts to tighten monetary policy.

The next rate-setting meeting of the European Central Bank (”ECB”) is rapidly approaching (August 3), and analysts are stepping up to offer their opinions on the direction of EU monetary policy. At its last meeting, on July 2, the ECB voted to hold rates at the current record-low level of 1%, and all indications are that the August meeting will yield the same result.

Despite getting off to a late start, the ECB has since moved adroitly to strike a balance in its monetary policy between inflation and growth. For those that insist that its rates are still too high - especially compared to the US and UK - the ECB can counter by arguing that this way it still has some scope to lower rates, if need be. “If a deflationary spiral does become entrenched, unlike most of the other major global economies, at least the European Central Bank still has some of the interest rate tool left to fall back on,” agrees one analyst.

The ECB can also refer critics to its overnight lending rate, which are 75 basis points lower than its main policy rate. “Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate. Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate.” It is at this refinancing rate that it recently lent out a record €442 billion to banks and other financial institutions.

While the ECB “has had one eye on the exit since the start of the crisis,” it nonetheless appears to be in no hurry to hike rates - neither its overnight nor its refi rate. Jean-Claude Trichet himself has said, “The current rates are appropriate.” He even refused to rule out the possibility that rates could even fall further before policy is tightened.

According to a Bloomberg survey of economists, this won’t happen for at least a year - the fourth quarter of 2010 to be specific. After all, inflation has touched a record low of -.1%. The Eurozone economy contracted by a record 4.5% last quarter. Private sector lending growth has fallen to a record low of 1.8%. All in all, not exactly the right environment for a rate hike. There is at least one vocal inflation hawk on the governing board of the ECB who is arguing for preemptive rate hikes, but for now at least he has been silenced. “Economists at Barclays in London have forecast that Europe’s policy makers won’t begin raising rates until late 2011.”

The forex markets, meanwhile, appear to be indifferent to this whole debate, concerned not about Eurozone growth, inflation, low interest rates, not to mention political uncertainties and trade deficits. The Euro has resumed its upward rise against the Dollar, begun in March, and may not slow down until the Fed starts to tighten monetary policy.

Plot the Japanese Yen against almost any “major” currency over the last few months (or few weeks for that matter) and you get a pretty consistent picture. Moreover, when you graph most Yen currency pairs against the S&P 500 (I like the AUD/JPY), the correlation is uncanny! Sure enough, it was reported recently that “Japan’s currency also fell the most in a week against the euro as futures on the Standard & Poor’s 500 Index rose 0.5 percent.”

This suggests that the main driver for the Yen is proximally, the demand for US equities, and ultimately, appetite for risk. “We’re seeing high-yielding currencies still rallying along with stock markets…The market is reverting to business as usual. That’s just spurring risk currencies forward,” explains one analyst. In other words, the carry trade is back, and investors are borrowing in the world’s cheapest currency (Japanese overnight interest rates are only .1%) and investing in higher-yielding alternatives. “There’s strong momentum behind this risk taking. You cannot keep your money in cash for zero returns unless you believe in deflation,” added a trader.

Experts on both sides of the Pacific Ocean are now encouraging their clients to short the Yen. “Japanese financial institutions are encouraging investors to put money into mutual funds focused on assets denominated in currencies such as the Turkish lira, South African rand and Brazilian real…Japanese investors were net buyers of 709.4 billion yen of overseas assets in the week ended July 11…” Goldman Sachs, meanwhile, has declared that the Yen is still overvalued, and “recommended investors use three-month forward contracts to sell the yen.”

There’s certainly some second-guessing taking place, especially with earnings season upon us. “Risk aversion is likely to stay prominent, given earnings announcements by companies including CIT. The bias is for haven currencies such as the yen to be bought,” insisted one analyst. In addition, Central Bank diversification has created some demand for the Yen and the Euro, but this is more of a Dollar-negative story than a Yen-positive story.

There are also signs that the Japanese economy is recovering, thanks to a pickup in exports. The fact that its economy remains so dependent on exports to drive growth certainly exacerbated the impact of the credit crisis. On the other hand, it could also magnify any recovery. “Japan’s merchandise trade surplus widened in June…to 508 billion yen ($5.42 billion) from 104.1 billion yen a year earlier. The nation’s trade performance appears to be improving, as the surplus was bigger than May’s 299.8 billion yen figure.”

Still, prices in Japan are falling (by 1.1% at last count), and there are strong concerns among economic officials that deflation could take hold. Accordingly, carry traders borrowing in Yen can rest easy, knowing that Japan is probably the least likely of any industrialized country to raise interest rates in the near-term.

Plot the Japanese Yen against almost any “major” currency over the last few months (or few weeks for that matter) and you get a pretty consistent picture. Moreover, when you graph most Yen currency pairs against the S&P 500 (I like the AUD/JPY), the correlation is uncanny! Sure enough, it was reported recently that “Japan’s currency also fell the most in a week against the euro as futures on the Standard & Poor’s 500 Index rose 0.5 percent.”

This suggests that the main driver for the Yen is proximally, the demand for US equities, and ultimately, appetite for risk. “We’re seeing high-yielding currencies still rallying along with stock markets…The market is reverting to business as usual. That’s just spurring risk currencies forward,” explains one analyst. In other words, the carry trade is back, and investors are borrowing in the world’s cheapest currency (Japanese overnight interest rates are only .1%) and investing in higher-yielding alternatives. “There’s strong momentum behind this risk taking. You cannot keep your money in cash for zero returns unless you believe in deflation,” added a trader.

Experts on both sides of the Pacific Ocean are now encouraging their clients to short the Yen. “Japanese financial institutions are encouraging investors to put money into mutual funds focused on assets denominated in currencies such as the Turkish lira, South African rand and Brazilian real…Japanese investors were net buyers of 709.4 billion yen of overseas assets in the week ended July 11…” Goldman Sachs, meanwhile, has declared that the Yen is still overvalued, and “recommended investors use three-month forward contracts to sell the yen.”

There’s certainly some second-guessing taking place, especially with earnings season upon us. “Risk aversion is likely to stay prominent, given earnings announcements by companies including CIT. The bias is for haven currencies such as the yen to be bought,” insisted one analyst. In addition, Central Bank diversification has created some demand for the Yen and the Euro, but this is more of a Dollar-negative story than a Yen-positive story.

There are also signs that the Japanese economy is recovering, thanks to a pickup in exports. The fact that its economy remains so dependent on exports to drive growth certainly exacerbated the impact of the credit crisis. On the other hand, it could also magnify any recovery. “Japan’s merchandise trade surplus widened in June…to 508 billion yen ($5.42 billion) from 104.1 billion yen a year earlier. The nation’s trade performance appears to be improving, as the surplus was bigger than May’s 299.8 billion yen figure.”

Still, prices in Japan are falling (by 1.1% at last count), and there are strong concerns among economic officials that deflation could take hold. Accordingly, carry traders borrowing in Yen can rest easy, knowing that Japan is probably the least likely of any industrialized country to raise interest rates in the near-term.

The next rate-setting meeting of the European Central Bank (”ECB”) is rapidly approaching (August 3), and analysts are stepping up to offer their opinions on the direction of EU monetary policy. At its last meeting, on July 2, the ECB voted to hold rates at the current record-low level of 1%, and all indications are that the August meeting will yield the same result.

Despite getting off to a late start, the ECB has since moved adroitly to strike a balance in its monetary policy between inflation and growth. For those that insist that its rates are still too high - especially compared to the US and UK - the ECB can counter by arguing that this way it still has some scope to lower rates, if need be. “If a deflationary spiral does become entrenched, unlike most of the other major global economies, at least the European Central Bank still has some of the interest rate tool left to fall back on,” agrees one analyst.

The ECB can also refer critics to its overnight lending rate, which are 75 basis points lower than its main policy rate. “Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate. Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate.” It is at this refinancing rate that it recently lent out a record €442 billion to banks and other financial institutions.

While the ECB “has had one eye on the exit since the start of the crisis,” it nonetheless appears to be in no hurry to hike rates - neither its overnight nor its refi rate. Jean-Claude Trichet himself has said, “The current rates are appropriate.” He even refused to rule out the possibility that rates could even fall further before policy is tightened.

According to a Bloomberg survey of economists, this won’t happen for at least a year - the fourth quarter of 2010 to be specific. After all, inflation has touched a record low of -.1%. The Eurozone economy contracted by a record 4.5% last quarter. Private sector lending growth has fallen to a record low of 1.8%. All in all, not exactly the right environment for a rate hike. There is at least one vocal inflation hawk on the governing board of the ECB who is arguing for preemptive rate hikes, but for now at least he has been silenced. “Economists at Barclays in London have forecast that Europe’s policy makers won’t begin raising rates until late 2011.”

The forex markets, meanwhile, appear to be indifferent to this whole debate, concerned not about Eurozone growth, inflation, low interest rates, not to mention political uncertainties and trade deficits. The Euro has resumed its upward rise against the Dollar, begun in March, and may not slow down until the Fed starts to tighten monetary policy.

The next rate-setting meeting of the European Central Bank (”ECB”) is rapidly approaching (August 3), and analysts are stepping up to offer their opinions on the direction of EU monetary policy. At its last meeting, on July 2, the ECB voted to hold rates at the current record-low level of 1%, and all indications are that the August meeting will yield the same result.

Despite getting off to a late start, the ECB has since moved adroitly to strike a balance in its monetary policy between inflation and growth. For those that insist that its rates are still too high - especially compared to the US and UK - the ECB can counter by arguing that this way it still has some scope to lower rates, if need be. “If a deflationary spiral does become entrenched, unlike most of the other major global economies, at least the European Central Bank still has some of the interest rate tool left to fall back on,” agrees one analyst.

The ECB can also refer critics to its overnight lending rate, which are 75 basis points lower than its main policy rate. “Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate. Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate.” It is at this refinancing rate that it recently lent out a record €442 billion to banks and other financial institutions.

While the ECB “has had one eye on the exit since the start of the crisis,” it nonetheless appears to be in no hurry to hike rates - neither its overnight nor its refi rate. Jean-Claude Trichet himself has said, “The current rates are appropriate.” He even refused to rule out the possibility that rates could even fall further before policy is tightened.

According to a Bloomberg survey of economists, this won’t happen for at least a year - the fourth quarter of 2010 to be specific. After all, inflation has touched a record low of -.1%. The Eurozone economy contracted by a record 4.5% last quarter. Private sector lending growth has fallen to a record low of 1.8%. All in all, not exactly the right environment for a rate hike. There is at least

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• Forex managed accounts with the leader in managed Forex trading
• Watch Forex trading in real time.
• Latest Forex news from all over the world
• Forex Peace Army is an ALL FREE SERVICE for the Community of Forex Traders with Forex Signals and Broker Reviews
• Japanese companies, severe conditions will continue. forex