Will Bernanke Support the Dollar?

Last updated 10/19/2009 9:40 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Fed Chairman Ben Bernanke will be giving a speech today at 15:00 GMT in San Francisco and although few market participants expect any market making news to come from the event, Mr. Bernanke may feel compelled to make a reference to the dollar given the recent weakness in the unit.

Over the week-end, Barron’s magazine ran a front page article arguing that the Fed should quickly raise rates to 2% in order to stem the depreciation of the greenback which in the past several days made fresh yearly lows against the euro and the Aussie. While we do not believe the Fed will raise rates anytime in the foreseeable future, most specifically because the US commercial real estate market is facing more that 1 Trillion dollars in rollover debt this year, the Fed may begin to signal that it is ready consider removing some of the ultra- accommodative quantitative easing policy measures that it has had in place since the start of the year.

One possible action that the Fed could implement would be a slow and steady removal from the MBS market where it has been the buyer of last resort on 75% of the transactions. If the Fed can extricate itself from this capital market without creating volatility in prices, the US yield curve could begin to steepen as investors become more confident in the US recovery. In turn that dynamic should help the dollar especially against the yen as interest rate differentials begin to widen out in the pair.

Today’s speech, which is intended to focus on Asia and the financial crisis, may skirt the whole issue of the dollar which could embolden the bears to push the greenback past the EUR/USD 1.5000 level. Clearly the Fed is pushing the limits of its policy of benign neglect towards the buck and will need to address the issue sooner rather than later in order to avoid a runaway market against the dollar.

Comments (3)

mohsiin

October 19, 2009 at 07:33 PM ET

q

m.hollingshaw

October 19, 2009 at 11:01 PM ET

Given no positive data, wouldn't any comments made by any of the Fed's members (I realise this speech has been made already I just mean in terms of future speeches) be seen as merely attempts to again slow the dollars dsecent?

bschlossberg

October 20, 2009 at 02:03 AM ET

Yes but that can often provide opportunities for short covering rallies

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.