Dollar ... Raising Rates?

After posting its steepest decline in 18 months, the dollar has rebounded ahead of this morning's release of the US trade balance for the month of May.

San Francisco's Fed President Yellen said that further rate increases by the Federal Reserve "make sense."

With higher US yields and continued speculation that the Fed is not finished raising rates, the dollar regained some of the ground it lost in the past few days.

As for the trade data that is due to be released at 8:30 this morning, we expect the deficit to come in around $55 billion for May, up slightly from April's deficit of $57 billion.

Although this should be bullish for the dollar, the main reason for the potential decline in the deficit is due to the fact that oil prices declined in May -- averaging $49.87/barrel on the NYMEX -- thus allowing US oil imports to ease.

With crude averaging $56.42/barrel in June on its way to $62.10/barrel on July 7 -- the highest price since trading began in 1983 -- there is considerable risk that subsequent trade deficits will resume their torrid pace and could likely surge past the current record of $60.1 billion reached in February.

Therefore, even a dip in the deficit to $55 billion may provide little support for dollar bulls as the market prices in a sharp reversal in the months ahead.

In addition to the trade balance, the US budget is also scheduled to be released later this afternoon and could be good news for the dollar.

Given the fact that June is often seen as a surplus month, the budget is projected to register a surplus of $20 billion as tax receipt payments rise.

Following on the heels of last month's smallest deficit for the month of May since May 2001, the White House is expected to revise down its forecast for the 2005 budget deficit to $350 billion -- well below last year's deficit of $412 billion.

This improvement in US finances may help to offset the negative effects that could come from further increases to the US trade deficit.