Dollar Drops as Bernanke Sees Downside Risks to Growth

Thu, Feb 28 2008, 00:53 GMT
by Hans Nilsson

CMS Forex

Dollar Drops as Bernanke Sees Downside Risks to Growth

• The dollar fell sharply against most major currencies pressured by speculation the Federal Reserve will continue to cut interest rates to combat US recession risks. Fed Chairman Ben S. Bernanke, echoing yesterday’s dovish comments by Fed Vice Chairman Donald Kohn, signaled the Fed is prepared to lower rates again as he sees downside risks to growth greater than inflation risks. These comments widened the dollar’s interest and growth disadvantages against most key currencies. The yen was higher supported by risk aversion. Sterling fell on weak UK consumption. The Australian dollar traded close to a high on widening yield advantage. The euro and Swiss franc made new all-time highs against the greenback.


• The EUR/USD broke its triple-top yesterday and rose to a new all-time high today. The technical outlook is bullish. The old triple top is acting as important support with no obvious resistance as the pair is in uncharted territory. The pair’s overbought condition is a risk to further advances but may last for a long time.

Financial and Economic News and Comments

US & Canada

• In prepared semiannual testimony on the state of the economy and monetary policy before the House Financial Services Committee, Federal Reserve Chairman Ben S. Bernanke said: “The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.” Bernanke acknowledged inflation risks but said “it is important to recognize that downside risks to growth remain.”


• US new home sales fell to a lower-than-expected annual rate of 588,000 in January, down 33.9% y/y. The pace of sales is the slowest since 1995. The median price of new homes sold was $216,000 in January, down 15.1% y/y. The average price of new homes sold rose to $276,600, still down 12.1% y/y.

• US durable good orders fell a more-than-forecast 5.3% m/m in January. Excluding transportation, orders fell 1.6% m/m, nearly matching consensus expectations. Orders rose 3.0% y/y, 2.8% y/y excluding transportation. The largest contributors to the decline in orders were civilian aircraft orders and fabricated metals orders.

Europe

• The UK GDP rose 0.6% q/q and 2.9% y/y in Q4 2007, the Office for National Statistics said. However, the GDP components indicate growth was less solid. Private consumption growth slowed from 0.9% q/q in Q3 2007 to 0.2% q/q in Q4 2007 and investment fell 0.5% q/q in Q4. Growth was supported by a large increase in inventories, a rise in government spending and a positive contribution from net trade. Inventories rose and imports fell as consumer reduced their spendings, not boding well for further growth.


• GfK’s German confidence index for March held at February’s reading of 4.5. An indicator measuring households’ willingness to make big purchases fell to -15 in February from -8.8 in January. A measure of households’ optimism about the economic outlook dropped to 14.6 from 28.7.

Asia-Pacific

• Japan postponed the nomination of a new Bank of Japan governor, indicating that the government cannot reach agreement with the opposition Democratic Party of Japan. The ruling Liberal Democratic Party-led coalition intended to nominate Toshiro Muto as BOJ Governor this week. He is considered by the opposition to be too close to the finance ministry.

FX Strategy Update