Tuesday, 27 March 2012

Data Saves Dollar after Bernanke's Dovish Display

Tue, Mar 27 2012, 14:29 GMT

Fed Chairman, Bernanke

by Nicky Ong - Traders Corner
The S&P/Case-Shiller index showed houses prices dropped in line with expectation, and more importantly at a slower rate than last month. As a result the dollar managed to reverse some of the losses it has experienced over the past couple of days.

Similarly CB Consumer confidence came in at 70.2, slightly off the 70.3 expected, but still close to the highest levels since this time last year. Positive data has been welcomed by dollar bulls as the cloud of ‘QE3’ has given license to sell the dollar over the past 24 hours.

The dollar has been under heavy selling pressure as Federal Reserve Chairman was surprisingly dovish when he addressed the Association for business economist yesterday. Despite the improvements in the U.S labour market Bernanke warned unemployment remained far from normal and required a continuation of accommodative monetary policy, essentially opening the door for ‘QE3’.

Over the past few months the greenback has strengthened against the likes of the Aussie, Kiwi and Yen as traders adjusted their view on monetary policy, with interest rate futures pricing in a potential rate hike before the 2014 forecast. However, Bernanke put a dent in these expectations yesterday.

This development may well reduce the positive sentiment towards the dollar somewhat, but there is no masking the improvement in the U.S economy and labour market which will be bullish for the greenback.

The Euro was propelled higher yesterday against the dollar on the back of Bernanke’s rhetoric, and a continuation of these gains were experienced in early European trade as Italy managed a successful bond auction. But gains were halted as GFK German Consumer Climate missed expectation, showing confidence dropped for the 1st time in seven months as higher oil prices reduce spending power for households.

Also helping the single currency gain against the dollar is a report suggesting German Chancellor Angela Merkel is willing to increase support for the debt ridden region by running both the temporary and permanent rescue funds in parallel. The meeting scheduled on the 30th March will provide the platform for EU Finance Ministers to discuss additional supportive measures.

Finally, it appears the Japanese Yen is set for more weakness. The Yen has been by far the worst performer of 2012 as the Bank of Japan’s monetary policies aimed at weakening their currency, combined with ultra-low rates have made the Yen an attractive funding currency for carry trades.

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