Morning Notes: Dollar Breaking Down

What’s wrong with the dollar ?

That was the question the Fast Money traders were asking Wednesday morning as the dollar continued to fall against a basket of currencies including the Euro, Canadian dollar, Japanese yen, British pound, and Swiss franc.

“The dollar is really trading lousy,” said Joe Terranova, Virtus Investment Partners’ Chief Market Strategist. “It really looks like it wants to make a substantive breakdown here.”

Part of the reason for the dollar’s weakness is the relative hawkishness of European central bankers compared to Fed. Chairman Ben Bernanke. The Euro broke above its 2011 high against the dollar today, ahead of the European Central Bank’s policy meeting Thursday, on investor expectations that ECB President Trichet will have strong words about controlling inflation.

Unlike the Fed, which has remained sanguine about inflation due to its focus on core price growth (excluding food and energy), European Central Bankers have made it clear that inflation is a growing concern. Euro area inflation hit 2.4% in February, according to statistics released yesterday by Eurostat. The increase was an acceleration from January’s 2.3% headline number.

Producer prices in Europe are also climbing faster than desired. Industrial producer pries climbed a greater-than-anticipated 1.5% in January from the prior month. Year over year, producer prices are up 6.1% in the Euro area.

“The chances are very high that Trichet will be hawkish in his comments,” said Kanundrum Capital’s Brian Kelly. “So that is driving the Euro today.”

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