Yields are the main factor driving flows. The key factor supporting the dollar is expectation of higher rates and acceleration of inflation expectations.
The results confirm the view that the euro zone export/investment-led recovery is graduating to a more self-sustainable level, supporting expectations of rising interest rates in 2006.
By choosing to act preemptively, before inflation becomes strong, the ECB is clearly looking to reducing short-term volatility to keep rates in growth-friendly territory.
There's clearly no case for the Bank to be cutting rates from current levels given the strength of the housing market.
The economy is showing signs of a broader recovery. I'm predicting rates will be unchanged for the rest of the year. There's a likelihood the next move may be up.