• Interest rate expectation was the biggest driver moving the currency market in the past fortnight. Although Fed Chairman Bernanke and European Central Bank President Trichet made it clear that keeping inflation at bay has moved to the forefront of central banks' concerns, economic reports released just did not tie in with their lines, pushing market to re-think if an early rate hike would be justified.
  
  
• Except for the US retail sales which outpaced market expectation, other data suggested that the US economy has yet to get out of recession. Specifically, the continued contraction of manufacturing activities in major US states including New York and Philadelphia and the plunge of housing starts to over 17 years' low cast doubt over Fed's room for maneuvering interest rates.
  
  
• The losses or falling profits reported by major investment banks such as Lehman Brothers, Goldman Sachs and Morgan Stanley, at the same time, reminded investors that the worst of credit crisis might yet be over.
  
  
• Meanwhile, the Group of Eight finance minister meeting held over the weekend of 13 Jun disappointed the market by not commenting on currencies in its communiqu? This also prompted market skepticism of the US' strong dollar stance.
  
  
• Across the Atlantic, the euro was also under pressure as ECB member Stark calmed market speculation by saying that series of rate hikes were not something that ECB was looking for. Another member Smaghi hinted that any tightening move might be limited to as far as July, suggesting that ECB has eased on its tightening bias.
  
  
• Looking ahead, a slightly dollar bearish tone may continue to take hold unless the Fed sounds extremely hawkish at the FOMC meeting next week.
  
  
• In the past two weeks, the US Treasuries were under pressure. Yields along the curve rose over 20 basis points with rise in the front end particularly acute. Although the market has become less enthusiastic on an imminent tightening by the Fed to fend off inflation threat, most are still convinced that at least a quarter point hike will be on the table at the FOMC meeting to be held in September.
  
  
• Judging from the performance of the US economy so far, we are not totally comfortable buying in the scenario of US taking interest rates up from 2.0%. However, with the US headline CPI shooting over 4% yoy and wholesale inflation soaring to above 7% in May, the Fed may be reluctant to risk running behind the curve and choose to pre-empt inflation expectation. At the moment, market has already priced in nearly 100% chance for the central bank to raise the Fed Fund target rate to 2.25% before the year end.
  
  
• Yield of 2-year notes resurfaced to levels above 3% while 10-year notes once marked the highest level this year, trading at 4.27%. Apart from the interest rate expectation, the US treasury market was also dented by the record-breaking crude oil prices, which were less than USD1 away from the psychological barrier of USD140 per barrel.
  
  
• Meanwhile, the rate prospect of the eurozone and the UK is much tricky. ECB projected an average annual HICP inflation of 3.2%-3.6% for 2008 but some council members hinted that a 25bp hike should be sufficient to bring the price levels back down to the Bank's 2% target. Similarly, despite the fact that BOE Governor Mervyn King was required to submit letter to Chancellor Alistair to explain high inflation for the second time ever, he downplayed the inflation risks as just temporary threats. The central bank rhetoric adds more uncertainties to the longer term rate outlook of the euroland.

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