Dollar spurred by Bernanke pep talk

Several doubts crept back in to the investment community overnight that weighed on risk appetite. Rising Asian dollars riding the tide of prosperity were pushed back on growing intervention concerns. Fed Chairman Bernanke sowed a seed of doubt in the minds of dollar bears as he reiterated his willingness to abandon his easy money stance. Meanwhile the flip side of economic recovery weighed on the commodity dollars whose recent strength is alleviating the task list of central bankers but also showing signs of weighing on external demand.

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Euro – The euro weakened against the Swiss franc, U.S. dollar and the Japanese yen following another downgrade for the long-term credit rating of Portugal. Moody’s cut the debt-rating on “increased political, budgetary and economic uncertainty.” Later this week the stakes will rise when the ECB turns its back on emergency monetary measures. The central bank loosened policy to deal with the recession and said in March it would likely start to hike interest rates this month adding to the sense of uncertainty for peripheral nations. The euro weakened as New York traders awoke to reach its lowest point of the day at $1.4159 regardless of a slight increase in the Eurozone PMI composite reading for March. The PMI services reading also accelerated marginally, although it does appear that across the Eurozone the burst of recovery has passed its best.

U.S. Dollar – The dollar index is higher for a second day with traders focused on a speech from Fed Chief Bernanke in Georgia on Monday. In it he threw down the notion that his instincts might be wrong and that the wave of rising commodity prices hitched to the recovery trailer might be more than transitory. If that proves to be the case and price increase land in the consumer’s shopping cart, Mr. Bernanke warned that “we would certainly have to respond to that and ensure that we maintained price stability.” The comments are probably less bearish than the headlines read but given the constant resurgence of woes in the Eurozone the dollar finds it easier to make headway when the saber-rattling begins. Mr. Bernanke also warned that the housing market remains weak and says the Fed expects “a very high rate” of foreclosures this year, which harms house prices and construction and remains a drag on a recovery that he claimed is “not as strong as we’d like it to be.”

Japanese yen – The Japanese yen weakened to ¥84.50 overnight as market rumors surfaced that the Bank of Japan was preparing to make loans available to the banking system to ensure that corporate customers deprived of cash flow had access to funds. Sources say that discussion is likely to be aired at the Bank’s April meeting. More bankers are turning sour on the yen as they look in the rear-view mirror at the wreck behind them in the wake of the disaster with many now following the prediction of sage-Sakakibara who reckons the yen will weaken per dollar to ¥90.00 this year. The yen rose against the euro to ¥119.40.

British pound – A jump in the PMI services index for March was the second supportive diffusion reading for the British economy this week and encouraged calls for a snapback in first quarter GDP. The Markit Economics/CIPS survey jumped from 52.6 to 57.1 and close to its best since February 2010. The company predicted GDP would recover from a contraction of 0.5% in the fourth quarter to expansion of 0.8%. The pound recovered against the dollar to $1.6250 rising by more than a cent on the news whipped up by firming expectations for tighter monetary policy. On several recent occasions the pound has responded by jumping after stronger data readings only to reverse track by mid-U.S. morning. There’s no reason to expect this latest batch of evidence to provide lasting support for the unit this time given the weight of government spending cuts coming into force. The euro fell by 1% against the pound to 87.31 pence.

Aussie dollar – The Reserve Bank maintained interest rates at 4.75% overnight and doused opinion that more monetary stringency might be required in the future on account of a strengthening Aussie dollar. The unit fell against the greenback for a second day reaching $1.0288 cents after the central bank said the unit was helping keep inflation data softer than it would otherwise have been. The unit remains vulnerable to mediocre domestic data and any reversal in risk appetite, something that was evident in equity markets around the region overnight.

Canadian dollar – A central bank survey of executives taken during the first quarter showed that the Canadian dollar was also creating awkward conditions for domestic businesses. The outlook for future sales darkened to its weakest in two years as executives blamed tepid sales expectations a stronger local dollar. More executives said inflation was picking up with a balance of those saying inflation would run beyond 3% jumping from 3% to 15%. Those expecting prices to range between 2% to 3% and above the bank’s targeted 2% rate also rose from 44% to 58%. The loonie weakened in earlier trade with commodity prices taking a break from recent gains and reached $1.0308 before rebounding. It recently traded at $1.0350 and ahead of a U.S. ISM non-manufacturing report expected to remain near its highest in almost six years.

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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