The US dollar fell on fears that the economy would enter a recession, with relatively pessimistic commentary from Fed Chairman Ben Bernanke and a dismal Philadelphia Fed Manufacturing Index result adding further gloom to economic outlook. Yet a later Dow Jones Industrial Average rout left the greenback on relatively stable ground heading into the New York close. Fed Bernanke chairman reiterated the central bank’s drive to cut rates “substantively” through 2008 in order to forestall further economic slowdown, and the Philadelphia regional manufacturing data only echoed the need for such monetary policy accommodation. Manufacturing activity slowed its worst levels since the month following the September 11 terrorist attacks in 2001. The significantly worse than expected Philly Fed release arguably overshadowed the simultaneous Bernanke testimony and the dollar fell significantly as a result.
Will Bernanke’s ultra-dovish commentary and the recessionary Philly Fed report be enough to depress the dollar through upcoming currency trading? Tell us what you think in the DailyFX Forex Forum EUR/USD Discussion.
Fed Chairman Ben Bernanke expressed concern over outlook for the future of US economic growth, emphasizing that the central bank stood ready to continue cutting interest rates in the face of slowing expansion. Bernanke likewise told legislators that lower interest rates would prove most effective in boosting economic growth if combined with a fiscal stimulus package aimed at temporarily boosting economic growth. Indeed, the Fed official said that a fiscal stimulus would be most effective if implemented quickly and aimed towards boosting aggregate spending in the broader economy. The clearly dovish commentary combined with the simultaneous Philadelphia Fed result and the later Dow Jones Industrials plummet to leave Federal Reserve rate forecasts even lower through 2008.
A 300 point tumble in the Dow Jones Industrial Average heightened calls for an inter-meeting Federal Reserve interest rate cut, with markets now pricing in a whopping 52 percent chance that the Fed will slower rates by 75 basis points through the month of January. Such an implied probability is up from a smaller 40 percent yesterday and truly underlines the level of fear surrounding financial markets and the broader economy. All else remaining equal, such dour interest rate developments should sink the US dollar against major forex counterparts. Yet we see that the sharp sell-off in the Dow and other risky asset classes has discouraged speculators from selling the risk-linked US dollar. Indeed, the greenback regained significant ground into the late New York session stock market sell-off.
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