Boris Schlossberg, Senior Currency Strategist for the DailyFX sent me an interesting article called Euro, Yen and Pound Going Nowhere Fast. Following are some highlights:

French non-Farm payrolls expanded at 0.3% versus 0.2% forecast but wage growth slowed in Q2 to 0.5% from 0.8% reading in Q1. The French wage data is consistent with the latest CPI releases from the Eurozone which suggest that while Producer prices continue to move relentlessly higher, pricing power in the 12 member region remains decidedly weak. The contrast between input costs and output prices should raise questions amongst euro longs regarding the probability of continued rate hikes from the ECB. While we doubt the European monetary authorities will flat our pause in their tightening campaign, they may choose to slow the pace of rate hikes perhaps ratcheting rates only to 3.25% rather than 3.50% by year end.

One key factor that may influence ECB official’s decision making process is the price action in EUR/JPY which reached all time highs in early European trade tonight coming to within a whisker of the 149.00 figure. Although the pair appears to have made a short term climax high, dropping 70 points soon thereafter, the long term implications of such high exchange rates clearly have to be a concern to EZ policy makers especially in light of the fact that exports are such a critical contributor to overall economic growth of the region. Last May, ECB much to the surprise of the market chose to hold rates steady resulting in a sharp sell off in EUR/USD. At the time, many analysts believed that the high rate of EUR/JPY was the true reason for the monetary policy makers hesitancy to raise rates. With EUR/JPY now trading nearly 300 points higher, traders would be well advised to watch this dynamic with care as it may suggest that further euro rate hikes are not nearly as certain as most market players believe.

By the way, Schlossberg is a short term trader yet the interest rate picture as painted above just may set the tone for quite some time. If expected hikes in Europe and the UK do not happen, it will likely be bearish for those currencies vs. the US dollar.

As far as sentiment goes, I can only speak for what I see on message boards like the Motley Fool, Silicon Investor, and articles posted from most other sources. Except for a rare article like the above, sentiment against the dollar seems excessively bearish. Back in February of 2005 everyone was yapping up the fact that Buffett and Gates were short the dollar. The US$ rallied significantly from that low. Even though there has been retracement of that rally, the US$ is making higher lows, thus that sentiment against the dollar still seems a bit unfounded.

The dollar was suppose to collapse when Japan stopped buying dollars, instead it rallied. The dollar was supposed to collapse when the US paused. Instead gold has collapsed.

Here is a chart to consider.

Admittedly that is a sloppy inverse H&S; pattern but it seems to be a valid bullish interpretation at least for the time being. The fate of the US$ may lie more in the hands of what Japan, the UK and Europe do with interest rates as much as anything the Fed does (barring immediate and unexpected rate cuts).

I have had my eye on the YEN for some time.
Please consider the following chart of the YEN index.

Last month Japan finally pulled the trigger on rate hikes. It was the first hike in 6 years ending years of ZIRP (Zero Interest Rate Policy). Japan seems concerned about their decision already.

Forbes is reporting Some Bank of Japan board members urged cautious policy.

Some members of the Bank of Japan’s policy board called for a cautious policy stance to avoid leading markets to think the central bank’s rushing to raise interest rates, according to the minutes of the BoJ’s July 13-14 meeting released today.
Last month the nine-member board voted unanimously to end the central bank’s zero rate policy by raising the target for the overnight call rate — the interest commercial banks charge each other for short-term funding needs — to around 0.25 pct from near zero.

The minutes said: “… some members said that it was important that the bank did not give the impression that it was rushing to raise the policy interest rate.”

One member even said the BOJ “should avoid giving the impression that it would carry out successive raises of the policy interest rate like the Federal Reserve,” the minutes said.

If Japan does hike rates substantially it will be a further drain on the world’s carry trades. Yet refusal by the BOJ to normalize interest rate policy could conceivably cause a YEN crisis at some point.

People seem excessively worried about (or hoping for) a collapse of the US dollar. If anything suddenly collapses it might be what people least expect: The YEN.

Mike Shedlock / Mish/