Dollar mixed as hopes for Jackson Hole solution fade

Two stimulus-driven stories are shaping up events on Wall Street on the eve of Bernanke’s Jackson Hole address. “Don’t expect Bernanke to offer more support for the economy,” is the warning from former Soros advisor, Richard Medley. He says that rear-view inflation resulting from the first two waves of quantitative easing have created resistance among FOMC members to doing more. But better-targeted relief could be on its way according to a New York Times article characterizing refinancing for millions of homeowners with mortgages backed by government agencies Fannie Mae and Freddie Mac. The loose talk is that qualifying borrowers could have mortgage rates reset to 4% freeing up more in terms of disposable income.

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U.S. Dollar – Following an earlier durable goods report that snapped back at a 4% clip the move higher in the dollar for lesser fears over the health of the economy was unmistakable. In one fell swoop it appeared that the likelihood of a third-round of quantitative easing was scotched. In reality the economic scorecard has been clouded more than ever by the latest market meltdown. Ahead of the Wyoming symposium of central bankers analysts are offering signs of health in the shape of strong trucking volumes around the economy, higher tax receipts for the government, firmer inflation expectations as well as a diminished likelihood of deflation. The dollar ought to benefit from hesitation from the Fed, but the reality is that Bernanke will reinforce his pledge to stand by ready, willing and able. The dollar’s strength yesterday may be all we get out of this lower likelihood of further Fed action.

Japanese yen – The dollar strengthened to its strongest level in two weeks rising to ¥77.21 as fears over the health of the global economy receded. A former chief analyst from the central bank and now Goldman economist warned the Bank of Japan to be prepared to take evasive action in the event the Fed does announce further stimulus measures. Naohiko Baba told Bloomberg television that the two-month wait following last year’s symposium before the central bank intervened to counter yen strength was badly thought out. The perceived lower likelihood of QE3 has weakened demand for the yen. The euro also rose to buy ¥111.17.

Euro – Greek bond yields remained lofty signaling concerns that a default might be triggered owing to the collateral demands from Finland. Solvency concerns are growing, which explains why several of the region’s governments have lined-up behind Finland to demand collateral in exchange for bearing the risk of holding Greek bonds. Germany says that no one member should be privileged over any other on this matter and that no collateral should be held. But the single currency remained firm although it has backed further away from overhead resistance at $1.4500 over the past 24 hours. This morning the unit buys $1.4420 against the dollar.

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