Dollar Firms With Hawkish Fed Rhetoric

Passing through the last day of a painfully slow week for economic data, currency traders tuned into a number of speeches made by Federal Reserve officials to place their dollar trades. For price action, the greenback spent most of the morning pushing higher against the majors, but position squaring at the end of the day ate the gains away.

In EURUSD, the overnight consolidation on a range top at 1.3050 led to a steep 65 point drop to 1.2985. For GBPUSD, a 145-point drop forced the break of a 4-month old trend line. However, since making a quick test of 1.9455, the pair has retraced more than a third of the move. The Swiss franc proved stubborn in the face of dollar bids the intra-day high around 1.2525 has seen less action than the 1.2480 area. Finally, erring on the side of caution, the safety and carry benefits of the dollar kept the unit moving higher against the yen.
Throughout the currency market, no other event had more risk attached to it than the G7 meeting which began today in Germany. No longer is China the sole concern of foreign exchange savvy finance ministers and central bankers. European officials have made it very clear that they would address the low level of the yen and their suspicions of manipulation through monetary policy. On a trade-weighted basis, the yen is the cheapest it has been in nearly 20 years. The Financial Times released an article earlier which suggested Democrats from the House of Representatives sent a letter to Treasury Secretary Henry Paulson encouraging him to join the European ministers in pressing the yen issue. However, Paulson reiterated his belief that the currency reflects economic conditions in Japan. Looking ahead to trade Monday morning, the stability of the prevalent carry trade will be based on the official statement that will come out of the G7’s two-day meeting. If there is even the slightest suggestion from the text that Japanese officials are manipulating their currency to subsidize exports (a accusation afforded to China for a few meetings now), then the a sharp unwinding of carry trades could depress the dollar sharply.
Back in the US, there were more than a few announcements from Fed officials that caught the eye of dollar traders. Two non-voting members caused a stir with their inflation expectations. Cleveland Fed Reserve President Pianalto remarked this morning that she was not concerned that there would be a wholesale unloading of US Treasuries nor would the inverted yield curve result in a recession. Combined with a hawkish outlook for inflation, Pianalto felt comfortable saying “more policy firming may be needed.” Elsewhere Dallas Reserve President Fisher said he was “fairly comfortable” with his inflation outlook. However, with rental and labor costs on the rise, he theorized buoyancy in prices could follow quickly. Equipped with a little more clout due to their voting rights, Susan Bies and William Poole blurred the Fed’s future. Bies announced her resignation from her position at the Federal Reserve this morning, effective March 30th. She said she would not attend the March 20/21st meeting. St. Louis Fed leader Poole on the other hand, joined the remaining fed members with the cautious outlook of a perpetual hawk. Poole predicted core inflation to return to a reasonable range; but anything above 2 percent would be unacceptable. Given his outlook for a pick up in growth and an easing in productivity, his objective may not materialize.
Equities were mixed in the morning hours as a slew of analyst upgrades and downgrades dominated the landscape. By 15:45 GMT, the Dow was marking the biggest move from the open with a 0.19 percent advance to 12,661.34. The tech-heavy NASDAQ slipped 0.13 percent to 2,485.41 by the same time, while the S&P 500 rose 0.1 percent to 1,449.69. Topping the headlines today, hedge fund Fortress Investment Group’s IPO jolted the investment industry. Shares rallied an astounding 70.8 percent on a $13 boost to $31.50. Elsewhere, computer maker Gateway Inc. proved it was struggling to compete with a 9 percent drop in revenues from a year earlier. Gateway shares sank 9.3 percent to $1.95.
Treasuries were sliding through the morning as Fed members flaunted their bias towards the possibility of future rate hikes. Ten-year notes traded 9/32nds off the open at 98-25 by 16:45 GMT with yields up 4 basis points to 4.780. The thirty-year bond dropped 18/32nds to 94-05 while its own yield also advanced 4 basis points to 4.879.