US Dollar - A Deeper Look into Bernanke's Comments (page 1 of 2)

DailyFX Fundamentals 02-14-07

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar - On Valentines Day, the Senate Banking Committee showed their love for Fed Chairman Ben Bernanke by applauding him for doing a good job of managing the US economy. This is a welcome shift from the attack and criticism that former Fed Chairman Alan Greenspan usually receives when he sits in the same chair. However even though the Senate was light on Bernanke, he was not as light on the US dollar. Traders were looking for the Fed Chairman to signal that another rate hike is needed in the near future but instead, Bernanke took a more moderate stance on inflation and warned that the housing market remains a drag on growth. These comments sent the US dollar tumbling and the move triggered a long awaited break in the EUR/USD. For the past month, the EUR/USD has remained trapped between 1.2865 and 1.3065; today's break took the currency pair to a high of 1.3151 before retracing. To clarify, Bernanke was not pessimistic about the outlook for the economy. In fact, he believes that consumer spending will continue to grow solidly and that even though inflation pressure could diminish the risks are still tilted to the upside. The main takeaway message from Bernanke is the same message that he left us with at the FOMC meeting in January, which is that they need to see more data before deciding what to do next with interest rates. The next monetary policy announcement is not until March 21st. There will a great deal of new information on how well the economy and the housing market are doing between now and then so if the economy does improve, a rate hike in March is not out of the question. Bernanke specifically said that he wants to see how well new and existing home sales fare in the spring before drawing any conclusions. On other topics, Bernanke sided with Treasury Secretary Paulson on Japan by saying that they are not manipulating their currency. He is not worried about dollar diversification and noted that fourth quarter GDP will most likely be revised downwards. Meanwhile this morning's retail sales and business inventories were non-events. Retail sales growth was flat in the month of January, which was weaker than expected. Excluding autos however, sales increased by a more than expected 0.3 percent. Retail sales for December was revised higher which indicate that the trend is still up. Business inventories were unchanged in December, which was right in line with expectations. November's numbers were revised down from 0.4 percent to 0.2 percent. Bernanke's testimony has set a moderately dollar bearish tone but the excitement has not ended. We are still expecting the Empire State survey, the Treasury's report on Net Foreign Purchases of US securities, industrial production, Philly Fed and the NAHB housing market index tomorrow. Bernanke will also be testifying once again to the House Committee where he will undergo another round of questioning.

Euro - The Euro continued to strengthen against the US dollar and it is doing so for a very simple reason. The European Central Bank has been crystal clear about their plans to raise interest rates again in March while the Federal Reserve is showing hesitation. Eurozone economic data has also printed strongly while US data has been mixed. This morning the French business sentiment report came out stronger than expected with the index rising from 104 to 107. Evidence such as this validates the unanimously hawkish comments that we have been hearing from ECB officials.