Dollar Slips On Paulson Testimony

In the absence of scheduled economic indicators, the dollar was put into motion in the New York session in reaction to and in anticipation of policy officials’ speeches. After Treasury Secretary Henry Paulson satiated fundamental hungry currency traders with his opinion on the US economy, the EURUSD extended the advance that began in early London trade.

Rebounding from near its range low around 1.2910, the pair pulled 70 points higher. The British pound capitalized on the broad dollar weakness, using 1.9590 as a spring board for 110 point rally. Typically the mirror image of the benchmark euro pair, USDCHF was making its own 100-point anti-dollar move; but the proximity of the range bottom seen near 1.2380 garnered some interest from the market. Finally, USDJPY was torn between the dollar move and a conflicting sell of in yen, leaving multiple swings between 120 and 120.60 to form a congestion band.
After a fundamental barrage last week, the US economic calendar fully unwound Tuesday with absolutely no market moving data scheduled for release. However, the day was not totally lost to institutional drift as the retail market prepared to absorb commentary from Fed officials and Treasury Secretary Paulson. Paulson started off the podium series with a number of market moving comments. Offering Testimony on US President George Bush’s proposed $2.9 trillion budget for 2008, the questions from the members of the House Ways and Means Committee began to drift towards topics more relevant to FX and the dollar in particular. Key from the Treasury Secretary’s remarks was his view on economic expansion in which he was “transitioning from a period of above-trend growth to a more sustained level of above 3.0 percent.” This is particularly interesting given the reported acceleration in fourth quarter GDP to a 3.5 percent pace. Another topic discussed that is near and dear to currency traders was economic reform in China. Taking his middle-of-the-road approach, Paulson reiterated the importance for the PBoC to move to a market-based exchange rate in the ‘intermediate term.’ However, he went on to say that the schedule that Chinese officials were working with to make that happen was different than the one laid out by US politicians. One more noteworthy mention concerned the level of the Japanese yen. With the yen at historically low levels, European officials have promised to address the issue at the upcoming G-7 meeting. Paulson, on the other hand, said he would not join the crowd in pressuring intervention. He instead said that he currency reflected “underlying economic fundamentals” and that it was his job to support “free competitive markets.”
While the Treasury Secretary will have a second chance at moving the market later in the afternoon with his testimony to the Senate Finance Committee, it is likely that he will cover the same topics. Instead, the rest of day will belong to Fed members. Chicago Federal Reserve President Michael Moskow didn’t mention the broad economy or monetary policy in his speech; but Chairman Ben Bernanke will make up for it when he specifically addresses the economy’s well-being. Later on, San Francisco Federal Reserve President Janet Yellen will speak in Los Angeles about the Asian Financial Crisis. It will be interesting to note if she draws any similarities to current conditions in any Eastern nations.
Equities were painted red Tuesday led by a steep drop in tech shares. By 17:20 GMT, the NASDAQ Composite led the group with a 0.51 percent drop to 2,458.06. Following suit, the S&P 500 slipped 0.15 percent to 1,444.87 while the Dow edged 0.12 percent lower to 12,647.08. Browsing the headlines, it was easy to see blue-chips were steering indices. Shares of Wal-Mart were $0.13, or 0.3 percent at $48.65 after announcing it will offer over 3000 movies and TV series for download from its retail website. Depressing the broad tech sector, Cisco Systems shares lost 1.1 percent to $27.20 as traders squared positions ahead of the firms earnings release due after the bell.
Treasuries found a modest boost in Paulson’s testimony this morning. The ten-year note was trading 4/32nds higher at 98-24 by 17:20 GMT, while its yield slipped 2 basis points to 4.786. T-bonds marked a 7/32nds advance to 93-31 as yields backed down 2 basis points to 4.891.