| 6/10/2008
2:50 PM: EUR/$..1.5446 $/JPY..107.39 GBP/$..1.9522
$/CHF..1.0427 AUD/$..0.9445 $/CAD..1.0235
Dollar Rallies on Bernanke
Jawboning in recent sessions has propped the
greenback sharply higher across the board, with
the currency hovering near 107.40 against the
yen and 1.5450 versus the euro. The verbal intervention
of late consisted of commentary from Fed officials
and US Treasury Secretary Paulson, which strongly
benefited the dollar in tempering expectations
for a continued policy of benign neglect in the
currency’s steep declines.
With the G8 Finance Ministers meeting looming,
traders will focus closely on any comments hinting
at the possibility of concerted intervention by
the global central banks. Although intervention
remains highly improbable, US Treasury Secretary
Paulson yesterday kept that option open if necessary.
Paulson addressed the issue of China’s currency
today, saying although he believes China needs
to allow its currency to strengthen more rapidly,
it was not ready for a market determined currency.
He also said the dollar should not be the scapegoat
for record level oil prices. Meanwhile, US Under
Secretary of International Affairs McCormick said
no formal discussion of currencies is expected
at the G8 meeting this upcoming weekend, but it
will likely be mentioned at the meeting. He said
that currencies have played a “minor role”
in the recent spike in oil prices. McCormick expects
it to take some time to work through housing market
and capital markets issues, but sees growth to
accelerate in the US before year-end.
Fed Chairman Bernanke, in a speech given late
Monday evening, all but confirmed that the FOMC
will leave policy unchanged barring any unexpected
shocks to the financial system with the dangers
to a “substantial downturn” in the
economy having subsided somewhat and burgeoning
upside risks to inflation. Bernanke said “the
FOMC will strongly resist an erosion of longer-term
inflation expectations, as an unanchoring of those
expectations would be destabilizing for growth
as well as inflation”. Dallas Fed President
Fisher echoed a similar tone today, saying the
downside risks facing the US are not as severe
as initially feared but will need time to recover.
Fisher said the Fed is cognizant of the negative
currency feedback loop and that a weaker dollar
can lead to further inflationary pressures, which
weaken the dollar further. He said that recent
survey signals on inflation expectations have
not been positive and will not tolerate fuelling
inflationary expectations.
US data released today saw a larger than expected
April trade deficit at $60.9 billion, versus calls
for $59.9 billion and up from $58.21 in March.
The economic calendar tomorrow will see the Fed’s
Beige Book economic report and the May Federal
Budget.
Loonie Rallies on BoC Unchanged Decision
The Canadian dollar reversed earlier losses,
rallying sharply against its American namesake
following the Bank of Canada’s announcement
to leave policy unchanged – contrary to
market expectations for a 25-basis point rate
cut. Further, the BoC signaled the end of additional
rate cuts as a result of inflation and that current
monetary policy was “appropriately accommodative”
to achieve its 2% inflation target. The Bank deems
inflation view to have shifted slightly to the
upside on strong global growth and commodity prices.
The BoC expects total CPI inflation rising above
3% in late 2008 compared with its previous forecast
of below 2%. However, it also added that the economy
is in excess supply with the risk remaining that
potential growth will be weaker than assumed.
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