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The U.S. dollar rallied against the euro rallied on the heels of Ben Bernanke's comments as the Fed Chairman pledges to use Fed policy to "ensure that the dollar is strong." He indicated that the central bank will monitor the dollar closely which implies that other nations may be pressuring the U.S. government to stop the dollar from falling. Coming on the heels of President Obama's trip to Asia, the timing of the Federal Reserve's support for the dollar suggests that this may be move to reassure their Asian partners. Consider this verbal intervention by the Obama Administration, which is one of the few things that could actually lead to a more significant rally in the U.S. dollar. We have previously said that the only thing that could stop the dollar from falling would be coordinated verbal intervention by G20 nations but now the Fed is preempting that by throwing their support behind the greenback.

Also, talk about currencies is typically relegated to the Treasury Secretary and therefore traders should be particularly worried by the fact that these comments are coming from the mouth of a central banker. There is a good chance that Bernanke ran these comments by Obama and Geithner and so this should represent the Administration's official support for the dollar. If it was up to the Federal Reserve, they would probably prefer to see further dollar weakness as it was only last week that we heard a Fed President say that the move in the dollar is not disorderly.

However Bernanke's comments on the economy do not support a recovery in the dollar and may be part of the reason why the dollar has not strengthened against all of the major currencies. The Fed Chairman's tone was relatively pessimistic. He sees headwinds and believes that future setbacks are possible. According to Bernanke, unemployment is much too high, credit is constrained and demand has fallen significantly. Economic activity remains weak and significant economic challenges remain but moderate economic growth is still expected for next year. Based upon Bernanke's tone, the central bank has more reasons to keep monetary stimulus in place for as long as they can. Therefore from an interest rate perspective, the dollar carry trade should remain in place. Yet, the U.S. government is trying to trigger some two-way action in the dollar by suggesting that they could take measures to stem the currency's decline but we believe that these are nothing more than open threats. Therefore the relief rally in the dollar may be temporary.

About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.