Surprising resilience in the service sector paired with hawkish commentary by Fed Chairman Ben Bernanke led the US dollar to advance against all of the major currencies, except for the Australian dollar. As a result, the Canadian dollar fell the most against the greenback as oil prices slid to $122/bbl, and was followed by the high yielding New Zealand dollar as the pair dipped to 0.780. On the other side of the spectrum, the low yielding Japanese yen and Swiss franc inched lower against the greenback as they traded at 105.10 and 1.04, respectively. The European currencies however, continued to rack up losses against the US dollar as the British pound trailed below 1.96, with the euro retracing early morning gains as it held at 1.54.
Fed Chairman Ben Bernanke continued to highlight upside inflationary risks during a speech at Harvard University as he reiterated the current rise in inflation expectations to be a ‘significant concern’ for the Fed, and vowed that price stability remains a ‘top priority’ for the central bank. On the economic front, the productivity report produced by the Labor Department marked a moderate improvement in the economy as the Nonfarm Productivity index rose to 2.6 percent from 2.2 percent, while the Unit Labor Cost component held steady at 2.2 percent. The manufacturing sector continued to reflect a state of expansion as the ISM Non-Manufacturing index held above the boom/bust line of 50, but inched lower to 51.7 from 52.0. However, fresh employment data spurred mixed reactions as the ADP Employment Change index rose to 40K from 13K amid the Challenger Job Cuts index surging to 45.6 percent from 27.4 percent.
The stock markets continued to face downside pressures as Moody’s warned Ambac and MBIA of a potential downgrade from the Aaa rating, and spurred an intraday reversal in the markets. As a result, the DJIA fell 12.37 points to 12,390.48 points, with Chevron shares taking the biggest fall out of the big 30. The broader S&P500 shaved 0.45 points to hold off at 1,377.20 points, with 194 stocks dipping to a new 52 week low.
The rise in long-term inflationary concerns swayed demands for US Treasuries, with investors turning away from the safe haven of risk free bonds in search of higher returns. As a result, the benchmark 10-Year yield surged to 3.976 percent from 3.900 percent, while the 2-Year yield rose to 2.451 percent from 2.423 percent.
Looking ahead, the Bank of England’s rate decision will kick off the morning at 11:00 GMT, and will be followed by the European Central Bank’s rate decision at 11:45 GMT. Both of the central banks are expected to hold their respective benchmark interest rate steady at 5.00 percent and 4.00 percent, respectively, and may spark renewed weakness in the US dollar as a result.