Dollar weakens as Fed focuses on jobs

IB FX Brief: Greenback weaker as Fed focus set to remain on employment

The driving forces behind a weaker dollar are likely to be showcased by Fed Chairman Bernanke this week as he speaks to the Senate in his twice-yearly testimony on monetary policy. Mr. Bernanke will likely reiterate the need for policymakers to retain focus on creating the conditions necessary to improve the labor market before it turns worried about the same inflationary pressures that fellow central bankers the world over are voicing concerns about.

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U.S. Dollar – As a result of concerns that monetary policy is likely to continue to feel a cold shoulder from the Fed the dollar weakened to its lowest in four months against a basket of global units. The dollar index shed 0.5% to stand at 76.85 as it fell most against rebounding European units. Later on Monday data scheduled for release includes income and expenditure measures as well as a reading of the health of manufacturing in the Chicago-area. The Dallas Fed also releases its manufacturing activity gauge.

Euro – The proposed path for U.S. monetary policy is seen as contrasting vividly with that of the single currency unit. As inflationary pressures have increased various members of the central bank’s governing council have stepped up to warn over the need to take remedial action. Another such member did the same over the weekend as Mario Draghi warned that as price pressures became more suspect the council would need to focus more closely on the timing of interest rate increases. His words were followed on Monday by a report showing EU-wide consumer prices remained above the ECB’s inflation target rising at a 2.3% year-on-year rate and the fastest pace since October 2008. Even though the report came in slightly lower than consensus investors continue to believe the euro will win the monetary policy prize ahead of the dollar by a mile. For now the forthcoming political battle over reshaping the European bailout mechanism remains a fleck on the horizon and as the euro makes gains, that fleck continues to feel unimportant. The euro surged to $1.3848 to commence the week.

British pound – Sterling rose against the dollar as rising oil prices weighed on the horizon for the U.S. economy. The size and speed of the pound’s ascent against the greenback gives the appearance that the move is likely to have been provoked by a good deal of stop-loss buying especially in light of the lack of data from Britain on Monday. The pound reached $1.6244 from $1.6118 at Friday’s close. The pound also matched the euro’s gains against the dollar thereby allowing it to remain steady on a cross basis with the euro today buying 85.29 pence.

Japanese yen – After making significant inroads against the dollar last week fuelled by turmoil in the Middle East, the yen lost some ground against the dollar at the start of the week easing to ¥81.83. Against the pound it was 0.8% softer at ¥132.75 and against the euro it was similarly weaker at ¥113.23. Firmer economic data is currently unlikely to deliver a change in the monetary stance at the Bank of Japan thereby creating a high probability of a spread disadvantage against the yen. A Nomura manufacturing index showed an increase in the pace of activity in the sector as the gauge expanded to 52.9 from 51.4. Industrial production rose by 2.4% in January while retail trade jumped by 4.1%. Confidence amongst small businesses also rose to an index reading of 46.6.

Canadian dollar – A robust growth reading for December helped propel the Canadian dollar beyond last week’s strongest level in three years. The monthly 0.5% growth rate exceeded forecast and meant that the economy expanded at a year-on-year pace of 3.2% rather than 2.8%. The central bank meets late in the week with little expectation amongst investors that it will adjust interest rates higher given the higher threat to U.S. growth, a decline in domestic retail sales, contained inflation and now a very strong exchange rate. The loonie budged higher to $1.0262 after Monday’s data.

Aussie dollar – China’s Premier Wen Jiabao announced a target rate of 7% for GDP over each of the next five-years. That number is short of the 7.5% target rate in the previous five-year period spanning 2006-2010. As Australia’s export fortunes have grown attached at the hip to those of the Chinese economy, investors were despondent at the downbeat projection and sold the Aussie dollar down to $1.0135. The unit later recovered as the greenback came under greater pressure. The Aussie advanced also against the Japanese yen to reach ¥83.25.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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