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Forex - Dollar holds steady after Bernanke testimony
02.15.2006, 11:43 AM
LONDON (AFX) - The dollar held steady after the much awaited testimony from US Federal Reserve chief Ben Bernanke yielded little more than what markets had been predicting.
His maiden report on the economy to the US Congress was almost identical to what the Federal Reserve Open Committee had stated at the last FOMC meeting at the end of January.
Bernanke reiterated that more rate hikes may be needed because of the threat of higher inflation from a strong economy and higher energy prices.
'The message was consistent with what the market was already expecting,' said Marios Maratheftis at Standard Chartered.
Markets widely expect two more US rate hikes this year, taking the benchmark Fed funds rate to 5.00 pct from 4.50 pct at present.
'Nothing in today's testimony seems to change this,' added Maratheftis.
Paul Ashworth at Capital Economics said Bernanke's stance was no surprise as he has been keen to 'stress the continuity he hopes to achieve with the Greenspan era at every opportunity so far'.
The dollar's immediate reaction to the news was choppy but trading ranges soon settled back at familiar levels.
With so much attention on the prospect for US interest rates, the dollar managed to weather a dismal reading in the portfolio flows figure for December.
Net portfolio investment in the US came in at 56.6 bln usd, well short of market expectations of 76 bln usd and crucially below the US trade deficit of 65.7 bln usd in the same month.
The impact of the data was muted because the data looks backward and all the emphasis at the moment is focused on the interest rate scenario, added Maratheftis.
Nevertheless, those concerned about the structural imbalances in the US economy will find the numbers worrying indeed.
'The negative surprise in today's headline number was attributable exclusively to a dramatic decline in foreign demand for US Treasuries to a six-month low of 18.3 bln usd,' Michael Woolfolk at the Bank of New York pointed out.
It now remains to be seen if the weaker demand in December continued into 2006 or was just a temporary blip caused by year end adjustments.
That aside, US industrial output data for January also disappointed, falling 0.2 pct from the previous month.
Daragh Maher at CALYON said the dip in the headline number was largely utilities driven and should seen in the context of strong growth in previous months.
Meanwhile, the pound pushed higher after the BoE's quarterly Inflation Report suggested that UK interest rates are likely to remain on hold for the time being and gave no hint that a rate cut could be forthcoming.
Yesterday's weaker-than-expected UK inflation data -- which showed CPI inching just below the BoE's 2.0 pct target in December and January -- had sparked talk of a rate cut in the spring, possibly as early as next month.
'The BoE's quarterly Inflation Report demonstrates a generally comfortable view of how the economy is progressing, and one which does not point to any need for a policy adjustment in the near term,' said Maher at CALYON.
The BoE forecasts CPI inflation to remain around the 2.0 pct target throughout the two-year forecast period and even beyond, while GDP growth is expected to 'pick up slightly above' its historical average over the next 12 months.
Moreover, BoE governor Mervyn King said in his accompanying speech that recent developments have helped support domestic demand, and that the recent slowing of consumption growth appears to have been 'relatively short-lived'.
Maher said the immediate implications are for a stronger pound, given that the market had anticipated a 'somewhat more dovish development', but the currency will nevertheless remain highly sensitive to any future data.
forbes.com |
