July 4th has come and gone yet the dollar rally is here to stay. There are 3 things driving the US dollar higher today:

1. Hawkish Comments from Janet Yellen

San Francisco Fed President Janet Yellen spoke in San Diego this morning. Like her counterparts at the Fed, she is paving the road for a third or fourth quarter rate hike. For dollar bulls, Yellen’s concerns about inflation and less pessimistic take on growth were encouraging.

On inflation, Yellen said that the Fed will not allow a wage-price spiral to develop and on growth, she was “reassured by recent data” which suggests that the “downside have, so far, been avoided.” It is important to note that she does expect weak growth to continue for the remainder of the year and for the unemployment rate to rise further. Although Yellen is not a voting member of the FOMC this year, the currency market is eating up any hints that the Federal Reserve will be more aggressive than the ECB with raising interest rates over the next 12 months.

2. Euro: No Bias Equals No Action

On Thursday, ECB President Trichet had his chance to engineer a new trend in the Euro but unfortunately he failed to deliver and instead his comments has turned the market Euro bearish. Trichet gave currency traders little to work with by introducing two new buzz words - “no bias.” This proved to be the biggest disappointment for Euro bulls and unless Trichet reverses his stance, no bias could lead to no action in the EUR/USD this summer. Since the beginning of the second quarter, the EUR/USD has been trapped within a 1.53 to 1.60 trading range and that range will probably remain intact until Labor Day. The weak German industrial production report supports the ECB’s belief that the Eurozone economy may not be able to handle another rate hike.

3. G8: The Only Risk is to the Upside

The only thing that can have a meaningful impact on the dollar is the G8 meeting in Japan which will be held from July 7 to July 9. Last month was the finance ministers meeting, which proved to be a non-event for the US dollar. However going into that meeting, there was a lot of speculation about the possibility of currency intervention and a major change to the language relating to currencies in the communiqué.

Inflation is a problem that central banks around the world are struggling with and the part of the reason why inflation has gotten to current levels is US dollar weakness. Official opposition to further dollar weakness by the G8 would trigger a major turn in the US dollar, one that could take USD/JPY towards 110 and the EUR/USD below 1.55.

G8 meetings have in the past been huge market movers for the US dollar. This time around, there hasn’t been any speculation about a change in the FX language, but if one was to happen, the only possibility would be dollar bullish comments.

China has already been unusually vocal about wanting to see the dollar stabilize and with oil prices hitting a new record high on Thursday, inflation has worsened. However no central bank governors are expected to attend the meeting in Hokkaido.

In the past decade, all of the meetings that have affected the FX markets have been attended by central bank governors. Therefore like the Finance Ministers meeting last month, the upcoming G8 meeting attended by world leaders could end up being a nonevent for the US dollar.