Dollar Soars as Fed Ignores Recent Disappointments in U.S. Data

Last updated 1/27/2010 3:08 PM ET (GMT -5) 6 Comments

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Kathy Lien

Director of Currency Research, GFT

Between Apple's introduction of the iPad, and the Federal Reserve's Monetary Policy announcement, investors have a lot to focus on this afternoon.  However the Fed managed to steal the limelight from Apple who was in the process of introducing its latest creation when the central bank released their monetary policy statement.  To the surprise of foreign exchange traders, the dollar skyrocketed as the Fed completely ignored the recent deterioration in the labor market and the decline in consumer spending.  Instead, the tone of FOMC statement was more upbeat than their tone back in December with the central bank saying that “economic activity has continued to strengthen.”  Adding to the bullishness of the statement was Fed President Hoenig’s dissenting vote.   The head of the Kansas City Federal Reserve believes that the improvement in the economy and the stabilization of financial conditions, no longer warrants “exceptionally low levels of the federal funds rate for an extended period.”  When you have one FOMC member voting in favor of more hawkish language in the monetary policy statement, additional members are likely to follow suit.  In fact, more members may even have sided with Hoenig if not for wanting to appear on the side Bernanke to smooth his nomination.

Not only did the Federal Reserve avoid acknowledging the recent deterioration in the labor market and retail sales reports, but they also completely took out their comment on the housing market.  As we have seen from this week’s data, the best days of the housing market could be over and instead of acknowledging or downplaying that information the central bank simply chose not to address it.  The Fed’s belief that the pace of recovery “is likely to moderate,” is an upgrade from their previous comment that it is “likely to remain weak.” Although the Fed is at risk of being blindly optimistic, the benefits far outweigh the costs particularly ahead of Bernanke’s nomination.  The Fed’s optimism should drive the dollar higher against all of the major currencies but until the optimism is supported by economic data, the central bank’s attitude may help risk appetite more than the U.S. dollar.

Interest rates were left unchanged and the Federal Reserve reiterated their plans to close a number of the liquidity facilities.  They also announced additional plans to stop temporary swap agreements and will be winding down their Term Auction Facilities.  In other words the Fed is gradually exiting out of their extraordinarily easy monetary policies.   Although the changes in the Fed statement are not a game changer, we hope that the central bank is right and that economic activity is strengthening.

We highlighted the changes in the FOMC statement below (with some comments on the language).  We also crossed out any sentences that were omitted from the previous statement in the current statement.  Hope you find this useful!

Comparing the FOMC Statements

Comments (6)

Clancy

January 27, 2010 at 08:04 PM ET

The Federal Reserve loves to talk tough act weak. Talk is cheap and moves markets and expectations. Bernake interest seem to lay in protecting bond holders of banks and financial institutions and not the genral public.He has mad it a mandate to ocrush any sign of deflation be it by "droppign money out of helicopters'. My bet is as the mortgage reset ramps up and delinquencies continue to rise and the next problems occur in the credit market they will be back to their old games.

alexjbrandt

January 27, 2010 at 08:41 PM ET

I agree with you there about their talk tough but act weak, same thing can be applied to their "We support a strong dollar " talk. Maybe they don't want to acknowledge that their policies have yet to really stimulate the economy. As for disappointments, I'm pretty confident that US GDP for Q4 will be a disappointment. Some of Novembers data has been revised downward recently, and coupled with weak data for December I don't see how anyone would expect GDP growth rate to be 4.5%. As for the dollars reaction to a weak GDP report, I have no idea.

schultzz.at

January 28, 2010 at 02:43 AM ET

The change in private inventories and resilient personal consumption should have helped to offset weakness in private investment in 4th quarter GDP.
However, deep imbalances remain and are even becoming deeper. For the first time since the 1930s transfer payments exceed taxes and social security contributions. That could be the reason why personal consumption is still strong despite declining wages. Personal consumption is already at 71% of GDP.
I also don't see any private job creation. The upcoming census will result in positive NFP numbers, but this is just another 'stimulus'. Structural problems remain.
Tom Schultz.

alexjbrandt

January 28, 2010 at 02:58 AM ET

Structural problems remain, couldn't agree with you more! :)

wwwin

January 27, 2010 at 10:03 PM ET

any thought on tomorrow's unemployment numbers...this Bernanke put may be just an egg he laid to because procedural confirmation vote is tomorrow...he is turning out to be a clown.. I am afraid he is going to be confirmed b/c of the fear factor, just like Hank Paulson played the fear factor to favor his buddies at Goldman Sachs and other good old ivy league boys

alexjbrandt

January 28, 2010 at 02:52 AM ET

I think the market expectations for the weekly jobless claims and continuing claims are reasonable. I believe overall the jobless claims have risen this month, so that doesn't bode well for a strong NFP report next friday. My employer just fired some more people last week, and now that the voters in my state have passed a measure to tax businesses on revenue (on top of net income) I don't see the labor market improving any time soon (at least where I live). As much as people don't like Ben, I have to give him credit for preventing what could have easily become a depression.

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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.