The dollar has come off the starting blocks with strength this morning following a televised interview with Chairman Bernanke in which he strongly defended Federal Reserve policy efforts to rescue the economy. He hinted that more bond purchases were possible on account of borderline economic growth in which persistently high unemployment posed the biggest threat to a double-dip recession should consumer confidence weaken. The pace of growth at which the economy is operating remains “close to the border.” Meanwhile Eurozone officials are creating borders of their own as a chorus of voices suggests that a bigger bailout fund is needed, which is something German Chancellor Angela Merkel is trying to dismiss.
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U.S. Dollar – To an extent Ben Bernanke poured cold water on the recent strengthening of U.S. economic data, which has led to a rally in several asset classes. His observation that an annualized pace of growth at 2.5% suggested that the central bank is dissatisfied with the pace of recovery. At this rate, said the Chairman, it will take four or five years to chip away at a near-double-digit rate of unemployment to bring it back to a more normal rate of between 5-6%. His comments shored up the dollar sending the index 0.75% higher to stand at 79.75. Investors recently bought the dollar after feeling more comfortable with the Fed’s actions, sensing that it was far from hell bent on devaluing its currency. Mr. Bernanke’s message gives the clear message that the Fed’s mission is far from complete, that the FOMC remains dissatisfied with the economic outlook and that it is prepared to commit to further quantitative easing rather than less in the quarters ahead.
Euro – The euro is feeling the backlash from an invigorated dollar this morning yet has more tensions brewing between member nations. Typically the euro has accelerated against the dollar at the first hint of future quantitative easing from the Fed. However, Mr. Bernanke’s insistence that his team is not attempting to ignite inflation above 2% appears to be buying credence among investors. There also appears to be unity among the FOMC that policy could be reversed in an instant and that it is committed to steady inflation. Such portrayal is harming the euro today, although discord across state borders appears to be growing. In a letter to the Financial Times Finance Ministers of Italy and Luxembourg called for the creation of unified European bond agency that would control as much as half of the issuance of fresh government debt in order to create a deeper bond market. Investors could switch between existing and new so-called E-bonds within the proposed mechanism. Already Germany has poured scorn on the plan saying that it hardly encourages nations to fix their finances.
Creating further division today is Belgian-backing for a motion to increase the size of the available bailout fund. Finance Minister Didier Reynders and Belgian central banker Guy Quaden both back enlarging the size of the commitment on the grounds that it will inevitably be required and to act sooner rather than later is more appropriate. Today a regular Brussels meeting sees ministers debate the prospects of ailing Portugal. The euro slipped to $1.3287 on Monday from Friday’s peak at $1.3438. Further pressure was bestowed on the single currency after French banking Chief Christian Noyer told Japan’s Nikkei newspaper that the euro was still overvalued against the dollar but remained fairly valued against the yen. He foresees little chance of a slide back into recession.
British pound – A resumption of woes in the Eurozone continue to hamper the pound versus the dollar. The pound fell to $1.5655 shedding 1.25 cents against a rising greenback this morning. Sterling rose versus the euro, which buys 84.74 pence but remains above last week’s 10-week low at 83.35 pence.
Japanese yen – The yen is weaker against the dollar to start the week. The greenback buys ¥82.86 having retreated in the aftermath of last week’s monthly payroll release to as low as ¥82.52. The chart is playing out a consolidation triangle for the dollar/yen pair predicting either reversal from or continuation of Friday’s lunge.
Aussie dollar – The Reserve Bank meets on Tuesday and is highly unlikely to change the setting for interest rates from the current 4.75%. After a strong close to trading last week the Aussie has recoiled on Monday to stand 0.6% weaker at 93.73 U.S. cents thanks to the resumption of concerns over the Eurozone. Commodity dollars typically weaken when risk appetite declines, which is precisely what we’re watching this morning. Also impacting the Aussie this morning is news of the worst spring floods for the nation in many years. The damage is impacting the quality of wheat and is likely to lead to lower output, negatively impacting the agricultural sector. That’s hardly what the economy needs after signs that consumer spending is tipping down.
Canadian dollar –The Canadian central bank also meets this week and again is unlikely to respond to rising inflationary pressures, admittedly inspired by accelerating energy costs. More of a concern for the Bank of Canada is sluggish growth, which dipped in the third quarter to an annualized pace of 1.1%. The local dollar today remains just ahead of 99.00 U.S. cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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