Hawkish remarks by Fed officials heighted the appeal of the US dollar Monday and led the reserve currency to advance against all of the major currencies expect for the British pound. As a result, the high yielding Australian and New Zealand dollar took the biggest plunge against the greenback. Falling commodity prices led the Canadian dollar to rack up losses as the USD/CAD pair rose to 1.028 ahead of the Bank of Canada rate decision tomorrow. On the other side of the spectrum, the carry appeal of the Swiss franc and Japanese Yen was overridden by Fed rate calls as the currencies fell to 1.0275 and 106.3 against the dollar, respectively. Finally, the euro turned from six week highs when it slipped 100bp against the greenback.
New York Fed President Timothy Geithner and Dallas Fed President Richard Fisher stoked speculation that the Fed may raise the benchmark interest rate this year as they called for ‘tighter monetary policy’ in order to stave off upside inflation risks. However, this wasn’t the typical hawkish rumblings as the policy makers were referring not to the US alone, but to the broader global economy. What’s more, a portion of Geithner’s speech ran in the FT Monday morning; and the central banker suggested a more established regulatory global framework be created to ensure major banks – on which the financial markets’ health depend upon – do not see run see problems resembling that of Bear Stearns or Northern Rock. On the economic front, the April pending home sales report marked its sharpest month-over-month increase since October 2001. The 6.3 percent improvement countered expectations of a contraction in purchases and brought the overall level of sales to its highest level in six months. On the other hand, the annualized figure was still deep in the red and the consistency of deterioration in leading housing sales, inflation, inventory and construction data has left the market skeptical on the promise in this indicator.
Fed chatter helped curb a follow through from Friday’s plunge, with Lehman Brothers adding to the mix as they posted a higher-than-expected 2.8B in losses for the second quarter. By the end of the session however, the DJIA rose 70.51 points to 12,280.32 points, with McDonald’s and Alcoa leading the winnings board. Among the broader indices, the S&P500 picked up 1.08 points to hold off at 1,361.76 points amid 326 stocks falling to a new 52 week low.
Upside inflation risks continue to boost the appeal of US Treasuries, with investors moving out of risk-free bonds as the risk of a Fed hike later this year builds. As a result, the benchmark 10-Year yield rose to 4.029 percent from 3.926 percent, while the 2-Year yield surged to a 12 year high of 2.727 percent from 2.389 percent.
Looking forward, the trade physical report may spur bearish sentiment for the US dollar as economists expect the deficit to widen to $59.6B from $58.2B. However, greenback trading may feel larger ripples from the Bank of Canada’s rate decision as market participants compare the direction of Canadian interest rates against those of the US as the former is expected to cut by 25bp to 2.75 percent.
Written by: John Kicklighter, Currency Analyst and David Song for DailyFX.com
