Bernanke’s remarks about “some bank failures” and rising inflation complicating the Fed’s task is escalating the damage in the dollar and equities and leading traders to believe that the current economic challenges are posing greater threat than the 2001 recession, where the slowdown was mainly a case of falling asset markets and a modest contraction in economic activity.
Interestingly, while the National Bureau of Economic Research has yet to decide to whether the U.S. economy is in recession (they usually decide on recessions about three to six months after they begin), Bernanke’s replies have all but confirmed the economy is already in recession. He says the current dangers are further complicated by ABS and MBS securities "dysfunctional credit markets" as well as rising inflation, which was not the case in the last recession.
Thus, rather than making comparisons to 1970s, it is more appropriate to state that the current threat is a combination of the surging oil prices and falling housing of the 1990-91 recession, of the credit crisis of 1998 and of the falling asset markets of 2001-02. With such an ominous combination, the BEA's silence and absence remain deafening and prominent.
These remarks are escalating the damage in the dollar and equities. The economy is already in recession, as well as the day’s dismally weak data are exacerbating the downside pressure on the dollar, which hit fresh all time lows against the EUR and CHF at $1.5205, and $1.5015 respectively, while hitting one-month lows against the JPY at 105.36. The combination of broad dollar weakness and the falling equities reflects the eroding confidence in the state of the U.S. economy, its currency and its equities, which have acted as an increasingly persistent means of attracting foreign financing of the U.S. imbalances.
The data earlier showed fourth quarter gross domestic product (GDP) remained unrevised at 0.6% vs. expectations of a revision to 0.8%, which is the lowest since Q1 2007. Notably, the personal consumption expenditure component of the GDP report was revised to 1.9% from 2.0%, but was offset by a slight improvement in the trade component. Jobless claims clear away any doubts from possible one time aberrations and rise 19,000 to 373,000 from a revised 354,000, with the four-week moving average slipping to 30,500 from 361,800. Euro’s Strength vs. USD rank behind four other currencies
While the dollar weakness story is dominating, it is worth stressing on the broad strength of gold, whose secular rally is advancing on central banks’ surging liquidity injections, fuelling rising inflation. The chart shows that Gold has shown the lowest year to date increase against the Aussie at 7% – underlining the currency’s broad strength – and the Swiss franc and New Zealand dollar at 8%. Interestingly, gold is up as much as 11% against the euro, which shows that the euro’s overall standing against all major currencies is lower than that of the Aussie, Kiwi, franc and yen.
This is also highlighted in the different currencies’ performances against the USD, whereby the euro’s gains versus the USD rank behind AUD, NZD, CHF and JPY. This suggests that the increase in EUR/USD remains largely a case of dollar weakness, thus, not a case for the ECB to jawbone its currency.
Ashraf LaidiChief FX StrategistCMC Markets USa.laidi@cmcmarkets.com
