A volley of Fed presidents sounded awfully cautious about the economy. Chief Bernanke sounded like a rich parent chiding a badly-behaved adolescent schoolboy as he described the economy at an address late on Tuesday. His acknowledgement of the problem to the school board was accompanied by a second-half “will do better” pledge. But hopes for a recovery delicately predicated upon a post-tsunami supply-chain rebound shackled to some meager slippage in gasoline prices seem woefully optimistic.
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U.S. Dollar – The Fed Chief dismissed claims that cheap monetary policy was responsible for slamming the dollar under the weight of rising commodity prices that caused a not insignificant blip on the inflation radar. And as risks rise today the dollar index is flexing as investors embrace its safety brought on by woefully downbeat comments about the economic recovery, which Mr. Bernanke described as “frustratingly slow.” While he concluded that the economy remains in need of sustained monetary stimulus, the market recognized the implication by extension the limitations that brings to other central bankers, whose hands are seen as becoming increasingly tied. New York Fed’s William Dudley called the recovery “distinctly subpar” despite “aggressive monetary and fiscal stimulus.” Dennis Lockhart of the Atlanta Fed described the growth picture of one of “inconsistency, hesitancy and unevenness” saying he was “rather troubled by what you might describe as a lack of conviction in this economy.” The dollar index rose by 0.3% to 73.75 as investors sold higher-yielding currencies and evacuated global stock markets.
Japanese yen – The words from Bernanke proved to be like a test-of-strength fairground attraction for the yen, which popped up to ring the bell at a new one-month high reaching ¥79.70 against the dollar. As economic risks rise the yen does better and is trading roughly 1% better against other majors. Notably the dollar is actually faring better than other majors as demand for the greenback filters down from losses for stocks.
Euro – German Finance Minister Wolfgang Schaeuble called for a greater role for Greek bondholders calling for them to take a “substantial share” during negotiations over a second loan to Greece. Mr. Schaeuble said that maturities should be extended to a seven-year term in order to give the fiscally-challenged nation a chance to find its feet. The euro eased from a peak in Asia at $1.4695 as the story did the rounds with sellers also dismayed by an April report showing the first monthly fall in German industrial production in four months. Analysts had predicted a gain over the prior month while the government report showed a decline in orders of 0.6% compared to a March-time gain of 1.2%. The trade balance also narrowed as both imports and exports slumped for the same month. The euro recently traded at $1.4628.
British pound – A Moody’s warning over the possible loss to the sovereign credit rating for Britain torpedoed the pound just about reversing the prior day’s jump. The pound sank against the dollar to $1.6350 from as high as $1.6475 on Tuesday. While it kept the outlook ranked as ‘stable’ for the U.K., Moody’s said that slower growth coupled with potentially weaker-than-forecast fiscal consolidation could cause strain on its debt metrics that could prompt the agency to reconsider its call on Britain’s rating. Earlier this week the EC reported that Britain was being overly optimistic in its growth outlook saying it could miss its budget deficit reduction program targets. The pound remained stable versus the euro at 89.31 pence while it tumbled to ¥130.75 against the Japanese unit.
Aussie dollar – A change in rhetoric embodied in Tuesday’s policy-setting statement from the Reserve Bank of Australia weighed further on the local dollar in light of declining regional stocks. The central bank moved distinctly away from wording it adopted in a May report stating that rates would likely move higher at some point. Yesterday it sounded assured that inflation would be back in line with target within a year following a softening in inflation expectations. The Aussie slid to $1.0589 U.S. cents at worst overnight and recently traded at $1.0629 cents.
Canadian dollar – The Canadian dollar has rebounded somewhat from an opening loss with the blow softened by a stronger than hoped for reading of housing starts last month and downside failure for stocks. Earlier in the session the Canadian unit slid to $1.0179 but has subsequently recovered to buy $1.0215 cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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