Dollar Soft, Bernanke Misunderstood

By Marc Chandler

The US dollar is little changed against the major currencies as North American players return to their posts. A modest extension of yesterday greenback losses was seem, but a consolidative tone has emerged as the market awaits new incentives.

Judging from the press coverage, we suspect many observers have misunderstood Federal Reserve Chairman Bernanke’s comments yesterday. They need to be placed in the context of what went before: namely several hawkish regional presidents spoke, seemingly raising the prospect of a hike as early as next year and a backing up in US yields. His comments justified the continued accommodative policy a necessary to make further progress in reducing unemployment, which he argues requires a faster growing economy.

While acknowledging improvement in the labor market, his concerns were two-fold: 1) that one could not be sure that the pace of improvement will continue and 2) that with high levels of long-term unemployment and the sheer number of jobs and hours worked below pre-crisis levels, that conditions are far from normal. That does not mean QE3 is around the corner to about to be signalled at the next FOMC meeting, as some claim.

While we do not expect the Federal Reserve to unilaterally disarm by denying itself a policy tool that it argues has been effective. At the same time, with the link between growth and job creation looser than historical and academic models suggest, a marked deterioration in conditions that either suggest a new recession is likely or that the threat of deflation has re-emerged is necessary to raise the odds of a new round of asset purchases.

Sterling got as close to $1.60 as possible without trading at that round level. The focus today is on a series of M&A opportunities. The UK reportedly is in talks with Abu Dhabi’s sovereign wealth fund which apparently wants to sell as much as a 1/3 of its 82% stake in RBS. Yesterday reports suggests BP is looking to sell its North Sea assets for around GBP2 bln. Lloyds is reportedly selling a loan portfolio to US’s Bain Capital for GBP500 bln. There is also some talk that the UK-South Korea trade deal is net positive to sterling as well.

The Nikkei rallied almost 2.4% to new 2012 highs and managed to finally close the gap created last year after the earthquake/tsunami. It finished the Tokyo session on its highs. While all sectors were higher, the financials led the way with a 3.6% gain. Health care was the weakest sector though stil up 1.3%. Separately Japan reported the corporate services prices fell 0.6% year-over-year in February after a 0.4% year-over-year decline in January, demonstrating that deflationary forces still have a grip on the economy.

Meanwhile the latest polls in France suggest a tightening of the presidential race. Hollande’s lead in the first round has reduced to 0.5% as in 28-27.5. It seems like the farther right and farther left candidates are drawing slightly more support. However, in the second round Hollande still has a strong lead 54%-46% over Sarkozy.

1 Comment
  1. Nduka ugbomah says

    This may be as a result of the fact that many traders feels whenever MR BEN speaks the dollar must sell( Traders sentiment)

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More