Dollar gains from Bullard’s European crusade

It’s a little early to enjoy the European springtime but St. Louis Fed Chief James Bullard is making the most of it as he hops between destinations. At the weekend it was France and now it’s the Czech Republic as he served up another warning that the Fed can’t maintain its loose monetary stance indefinitely. His words have reminded investors that the savior of economic growth can just as easily be removed, which makes the dollar an alternative asset rather than serving as a whipping boy when all around are looking for units to take advantage of rising asset prices spawned by recovery.

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U.S. Dollar – The dollar was jolted higher after Mr. Bullard’s speech this time in Prague, argued again that conclusion of the Fed’s bond purchase program shouldn’t go ahead if it risks stoking uncontrollable gains in asset prices serving to drag inflation into the mix. The Fed can’t wait around for every single uncertainty to be resolved at the risk of watching inflation accelerate noted the St. Louis Fed Chief. Communicating its exit strategy effectively is now lighting a fire beneath the dollar where some had felt the embers were safe to tread upon. The dollar index rose to 76.31 after paring some of Monday’s gains and remains buoyant ahead of an expected dip in consumer confidence reading later today. The dollar is rising as vocal concerns of fellow members appear from day-to-day. His colleagues Lacker and Plosser also voiced concerns about the future path of inflation as reasons for a faster rethink than many had thought possible.

Euro – The single currency was earlier buoyed by concern from ECB Chief Trichet that resilient inflation might prove sticky above the central bank’s 2% target. The euro rose earlier to $1.4148 but post-Bullard traded lower to $1.4053. Central bankers Yves Mersch and Jozef Makuch are also scheduled to speak later on Tuesday with participants not expecting to hear softness over resounding support for monetary tightening at next week’s meeting at the governing council. A German GfK poll showed the first downturn in consumer expectations in 10 months in a survey taken ahead of the Japanese earthquake. The survey portends a possible cooling at the heart of the Eurozone where economic activity has been bubbling under. The euro remains firmer against the pound and the yen on Tuesday.

Japanese yen – The yen weakened versus the dollar after Bullard’s comments while stop-loss yen sales were triggered as the dollar breached ¥82.00. The dollar’s ascent to ¥82.33 comes as Japanese lawmakers figure out how to deal with funding the rebuilding of the devastated areas when the public debt already towers the national output by a factor of two. Some have suggested that rather than stepping up sales of bonds the Bank of Japan should instead purchase government debt directly. In the news in Japan today is a political suggestion to raise levies on individuals and postpone plans to cut the corporate rate of tax in light of the need to raise public funds. The disaster struck just as the domestic economy appeared to be improving according to today’s employment report for February, which showed a decline to a 4.6% jobless rate following a 4.9% reading the previous month. Jobs available were the highest in two years. The yen eased per euro to ¥115.75 and per pound to ¥131.31.

British pound – As the April Bank of England meeting draws near the pound is suffering at the reduced likelihood of an imminent increase in interest rates. The ECB is also scheduled to convene on April 7 and is widely predicted to tighten policy. Why? Because they already said they would! The pound remains near its lowest in five months versus the single European currency at 88.16 pence while against the dollar the pound fared worse during March ranked against the dollar’s top 10 currency nations. The pound dipped to as low as $1.5943 after Bullard’s breakfast in Prague.

Aussie dollar – While the British pound languished, the Aussie flourished and over the last two weeks has gained more than 3% against the greenback making it the top performer. The recovery in Asian stocks on Tuesday helped the unit recover some of Monday’s losses only for the Aussie to pull back in to the red. Later in the week dealers expect a retail sales report to feel the boost to consumer spending from insurance checks received after the Queensland flooding struck. In today’s data home sales rose by 0.6% in February compared to a 2.4% rise during January.

Canadian dollar – Despite the collapse over the weekend of Stephen Harper’s government, the Canadian dollar failed to bat an eyelid. Just water off the duck’s back as they might say of the loonie. The unit continues to trade off relatively healthy economic fundamentals and politics isn’t worth a hoot. The dollar lost ground to the greenback as the Bullard effect washed up north of the border too. The Canadian unit eased to $1.0240 U.S. cents with crude prices also weighing on sentiment towards the commodity-sensitive currency.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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