Dollar Propped By Ben Bernanke ? But Are His Words Enough?

Escalating his rhetoric in the defense of the dollar Fed Chairman Ben Bernanke stated on Monday at conference at MIT

[B]Talking Points

• Japanese Yen: continues to grind higher off Bernanke’s comments
• Euro: Whipsawed by Bernanke but French IP rises
• Pound: Ultra hot PPI data boosts to within whisker of 1.9800
• Canadian Dollar: BOC Rate decision on tap
• US Dollar: Trade Balance key event risk today[/B]
Dollar Propped By Ben Bernanke – But Are His Words Enough?

Escalating his rhetoric in the defense of the dollar Fed Chairman Ben Bernanke stated on Monday at conference at MIT that, “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so," adding further, ”The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations."

Dr. Bernanke new found role as an inflation hawk helped fuel a dollar rally overnight. EURUSD traded down to 1.5550 and USDJPY spiked all the way to 106.84 on expectations of possible rate hikes from US monetary officials sometime in the near future. However, whether Chairman Bernanke’s will have any lasting market repercussions remains to be seen. Note that he was similarly sanguine about the state of the US housing market before that sector of the economy started to crumble.

Clearly, the FOMC officials are concerned about the growing threat of runaway inflation in the US economy but given the serious slowdown in demand they may have few options to combat it. Much like in the late 1970’s and early 1980’s the Fed faces the prospect of both rising prices and rising unemployment. At thst time Chairman Volker decided to increase interest rates to combat inflation at the expense of growth. As a result the “misery” index (the combined level of unemployment and inflation ) rose to record highs.

We remain skeptical that Dr. Bernanke and the rest of the FOMC will choose this path, especially in a election year when such policy action could grossly alter the political landscape. At best, the Fed will keep rates stationary for the rest for the year and will try to use the power of its pulpit to talk the dollar up. However, the power of it rhetoric will soon lose it punch if the US economic data continues to deteriorate.

Meanwhile data on the other side of the ocean remain remarkably buoyant with Both French and Italian Industrial Production printing better than forecast. The French IP rose 1.4% versus 0.3% while Italian rebounded 0.7% from –0.2% the month prior. Taken together with yet another sharp rise in German Producer prices which increased to their highest level since 2005, the economic news from Europe is far more supportive of President Trichtet’s threat of a rate cut than any piece of data of from US.

The currency markets were clearly scared of Mr. Bernanke remarks fearing the power of US authenticities to intervene in trade. However, once the power of Chairman’s words fades from memory, trades will once again have to asses the health of the US economy and if consumer demand shows signs of significant deterioration, no rhetoric will help the buck. That’s why this Thursday’s US Retail Sales report remains the key event risk of the week.

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