US Dollar Consolidates Losses On Mixed Fed Speech From Bernanke, Mishkin, Fisher

Dark clouds hung over the US dollar as the currency consolidated losses against most of the major currencies. Indeed, the euro held near the 1.52 level for much of the day after hitting an all-time high of 1.5275 yesterday. Meanwhile, the yen gained in the afternoon amidst sharp losses in the equity markets, but signs of a return to risk-seeking behavior in the markets took the wind out of the currency’s sails. On the other hand, the Swiss franc pushed higher against the US dollar and British pound as fresh data showed inflationary pressures starting to ease while GDP grew at its fastest pace in two years.
Fed officials were unable to find common ground as Dallas Fed President Richard Fisher argued that rising inflation posed the biggest threat for the US economy, while Fed Governor Frederic Mishkin contested the argument and stated that the recessionary fears for the economy will be the greatest challenge for the Fed. The difference in opinion raised speculation that inflationary concerns may restrain the Fed from aggressively fostering economic growth, and left market participants praying for a 75bp rate cut. Fed Chairman Ben Bernanke however did not join the talks as he turned his attention to growing pressures in the housing market, and insisted that mortgage lenders and investors should lower the principle on their loans as home prices continue to fall. He also added that the Bush administration is taking the necessary steps to help the slowing economy, but suggests that the government should plan to get more involved in supporting economic growth for the US. The Fed will meet on March 18th to set rates once again, and is expected to cut rates by at least 50bp.
Increased volatility took hold to the securities market as share prices plunged during the morning session, but retraced later in the day as the struggling bond insurer Ambac Financial is expected to receive a capital infusion from banks such as Citigroup and UBS AG. As a result, the DJIA rebounded from a 200 point drop earlier in the session to only lose 45.10 points by the end, leaving the index at 12,213.80 points as Exxon and Caterpillar posted the biggest losses, while IBM and HP led the handful of winners. The broader S&P500 fell 4.59 points to hold at 1,326.75 points, with Jackson Hewitt Tax Services and Xin Yuan Real Estate posting the biggest losses, while IFC Capital and Standard Pacific topped the winner’s board.
The demand for US Treasuries was curbed as the capital infusion of Ambac Financial raised the risk appetite of investors, and pushed bond prices lower. The benchmark 10-Year yield rose to 3.61 percent, while the 2-Year yield rose to 1.66 percent.
For tomorrow, the ISM Non-Manufacturing Composite will be the major market mover for the US dollar, and is expected to lift spirits as the index is expected to climb to 48.0 from 44.6. Following the economic release, all eyes will turn to the Reserve Bank of New Zealand as they are expected to hold interest rates at 8.25 percent during tomorrow’s meeting.