Eurozone inflation measured 3.7% year-on-year in May, the highest rate for 16 years, reports Bloomberg. This increases the likelihood of an interest rate hike by the ECB in July, putting more downward pressure on the US dollar.

Money Morning’s William Patalon III discusses how rising inflation is dominating the news on both sides of the Atlantic:

Undoubtedly, a universal theme is emerging at the Fed and other world central banks: Inflation, Inflation, Inflation.

Whip Inflation Now…Where Can We Get Help on Inflation?…The Patient Died Anyway…Inflation in Asia and Europe…There Are No Good Solutions

Can you talk a currency into gaining value? It seems Fed Chief Ben Bernanke and European Central (ECB) President Trichet think so. They’ve been telling anyone who will listen how serious they are about fighting the inflation monster that would cheapen their currencies.

More dollar strength… Retail Sales surprise… SARB raises rates! Gold on the slippery slope…

 In the currency market, the dollar rallied against the euro. Late Thursday, the euro was trading at $1.5421 vs. $1.5548 on Wednesday. The buck was supported by better-than-expected retail sales, which boosted expectations for a Fed rate hike.

Gold declined from the far East into the first hour of the New York session on Thursday, bottoming at $857 before rallying after the noon hour to finish at $868.40/oz., down $11.70. Overnight, gold has fallen off further.

There is a 95% chance that the US economy will enter a recession, according to a report in BusinessWeek magazine.

Jennifer Yousfi in Money Morning gives some background and examines strategies for recession proof investing:

U.S. Federal Reserve policymakers cut the benchmark interest rate by less-than-expected three-quarters of a percentage point at their last meeting, a move that was designed to energize a badly flagging economy without causing inflation to spike or exacerbating the greenback’s decline.

With a wheezing economy that’s struggling with housing and credit problems – as well as a weak dollar – it’s clear the United States won’t be in the investment spotlight this year.

Trichet talks tough! Kohn sends warnings… The currencies bounce back! Will the BLS create ghost jobs?

The European Central Bank has hinted that it may toughen its stance against inflation with higher interest rates from next month, reversing recent US dollar gains and causing a $5 jump in the price of oil, reports Bloomberg.

“Europe’s central banks have clearly made inflation their priority, a stark contrast to the U.S. Federal Reserve’s aggressive rate-cutting campaign.” says Jennifer Yousfi in Money Morning.