Bernanke Wins Senate Confirmation
US Federal Reserve Chairman Ben Bernanke overcame stiff opposition in the US senate and was confirmed by a vote of 70-30. Democrats voted 47-11 in Bernanke’s favor and Republicans voted 22-18 for confirmation. Bernanke will serve another four year term beginning February 1st 2010. Despite the victory legislators may propose legislation that would allow congress to audit the Fed and remove the Fed’s bank supervision powers a move Bernanke opposes. Vincent Reinhart, a former Fed official stated, “I can’t imagine that there will not be separate legislation or some piece of legislation that is the Federal Reserve Reform Act of 2010.” Bernanke received the most opposing votes since the Senate started confirming Fed chairmen in 1978. Prior to 1978 the Senate confirmed members of the Fed’s board of governors and the President appointed the Fed chairman from the board of governors.
Distrust Of the Fed Widespread
Many distrust the Federal Reserve and in the House of Representatives uber conservative Ron Paul has repeatedly called for the abolition of the Federal Reserve. Paul garnered 300 supporters last month and passed legislation that would allow congressional investigators to audit Fed rate decisions. Legislators are also attempting to reduce the influence of regional Fed presidents and gain more power over Fed appointments. Former Fed economist Gregory Hess stated, “There are going to be additional constraints put on the Fed unless the administration leans hard to defend the Fed as an independent institution.” Former Fed Governor Laurence Meyer stated that US stocks, bonds and the dollar could collapse if investors think congress is meddling with the Fed policy setting panel and violating its independence.
Bernanke Opponent Says “Banks Win”
Some opposition to Bernanke’s confirmation was caused by resentment over banks reluctance to lend bailout finds provided by the Fed and the payment of large bonuses to executives while millions of Americans have lost jobs. Rhode Island Democrat Sheldon Whitehouse said the chief beneficiaries of emergency measures taken by the Fed were Wall Street firms. Whitehouse stated; “If you’re the scorekeeper of our recovery, it looks like it can be summarized in the two-word phrase: Banks win.” Obviously Whitehouse voted against Bernanke.
Schumer Says Fed Needs Independence
New York Democrat and Bernanke supporter Charles Schumer said that congressional measures to reduce Fed independence could lead to meddling by politicians into such policies as interest rates. Schumer summed up his position when he said; “If you don’t like monetary policy when the Fed does it, just wait until the politicians get their hands on it.”
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Pound Gains on Euro, Dollar
The pound is at a one month high vs. the euro as European Union Finance Ministers delivered a stern message to Greece and the ZEW Center for European Economic Research posted worse than expected investor sentiment results. At the present time Greece’s debt accounts for more than 120% of its GDP and has triggered several credit downgrades. Greg Gibbs of RBS stated, “The problems in Greece will be much harder for the market to gloss over this year, and there is not a solution which appears good for the euro.” The pound gained as much as 1% vs. the euro trading at 87.15 pence its highest level since September 2009. Against the dollar the euro was down 0.9% at $1.4258. The pound gained 0.2% against the dollar and traded at $1.6379 after hitting a high of $1.6458.
Loonie and Aussie Fall
The dollar gained 0.7% against the Canadian dollar after the Bank of Canada lowered its growth outlook, kept interest rates steady and said a strong currency poses a risk to the nation’s recovery. The Aussie dollar fell after China’s central bank ramped up efforts to tighten liquidity. Australia is a chief supplier of iron ore and coal to China and any slowdown in Chinese growth is likely to hurt the Aussie. The Chinese actions dampened risk appetite and bolstered the US dollar against the yen and high yielding currencies.
Pound Boosted by Cadbury Sale
The pound was boosted by a 2.9 year on year increase in consumer prices in December. The Bank of England left rates at a record low of 0.5%. BOE Governor Mervyn King is expected to deliver a speech today in Exeter, England. Ronald Leven of Morgan Stanley in New York stated, “The high inflation is creating an impression the Bank of England is potentially going to move more quickly. The market’s going to pay a lot of attention to King’s speech today. We’re starting to see more enthusiasm in the market to be long sterling.” The pound also gained on the news that Cadbury Plc agreed to a 11.9 billion-pound ($19.7 billion USD) offer from US based Kraft Foods Inc.
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China Tightens Monetary Policies
Last week’s winners, the Aussie and Kiwi dollars fell from near two month highs after China’s 21st Century Business Herald reported that Chinese banks are reducing property loans in addition to other government policies designed to prevent possible asset bubbles. The chief economist for the World Bank said that a return to recession conditions is possible. World Bank economist Justin Lin told the Council on Foreign Relations that global recovery may not be sustainable and that “A second dip is a very likely scenario.” Remarks by German Chancellor Angela Merkel and European Central Bank President Jean Claude Trichet pressured the euro. Merkel said that Greek budget deficits would hurt the euro and Trichet said that Greece would receive no special treatment. The Aussie fell 1% vs. the greenback to 92.23 U.S and the Kiwi fell 0.7% to 73.77 U.S. cents. Against the yen the Aussie declined 1.5% to 83.75 yen while the Kiwi fell 1.1% to 83.75 yen.
Persistent Greek Fiscal Problems Pressure Euro
Traders believe the US dollar is likely to benefit from the ongoing Greek fiscal crisis but most also believe the dollar’s gains will be limited by uncertainty about the US economic outlook. Greek fiscal concerns are likely to pressure the euro for some time despite Greek plant to hike taxes and cut expenditures. Problems in other euro zone nations have also caused concerns. Dean Popplewell chief currency strategist, at OANDA stated, “I do not think the market has fully priced in the extent of the problems in Greece including the other troubled countries in the euro zone — Portugal, Ireland, Italy, and Spain. I don’t believe the situation is contained and I think investors will still demand U.S. dollars as some form of safe-haven.”
Jury Out on US Economy
In addition to euro zone data markets will be focused on upcoming US economic data this week. Data to be released this week includes U.S. net capital flows, producer prices, housing starts, and initial jobless claims. Tim Evans of Lind-Waldock said, “The jury is still out about the U.S. economy. People are concerned that the optimism we saw with good U.S. numbers may be waning a bit, that this recovery may be slowing.”
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Dollar Falls Against Majors
The dollar fell broadly against most currencies after the Fed’s beige book report showed that the US economy still faces significant challenges. Although the report showed some improvement the US economy Fed rates are likely to remain low for an extended period. Kathy Lien of GFT Forex stated, “The U.S. economy is chugging along, albeit at a slow pace, and that means the Federal Reserve has no real urgency to raise interest rates.” The ICE Dollar Index was down from 77.011 at 76.875.
Ongoing Greek Fiscal Problems
The euro fell 0.2% to $1.4477 down from $1.4510 on Wednesday. European Central Bank President Jean-Claude Trichet said that the outlook for the euro zone is uncertain and that Greece’s economic problems would not receive special treatment. Greece’s fiscal problems have pressured the euro in recent trading sessions. The government of Greek Prime Minister George Papandreou approved a plan to reduce the country’s deficit below the European Union’s budget limit in 2012. Trichet said that, “no government, no state can expect special treatment.” The ECB left rates at 1% which most analysts had expected. Trichet’s remarks have led many experts to believe that Greece can expect no help from the EU. German Chancellor Angela Merkel questioned the fiscal policies of other EU nations. In an interview with the German newspaper Die Welt Merkel said, “The Greek example can put us under great, great pressures,” she said, according to the transcript. “Who will tell the Greek parliament to please go ahead and pass a pension reform? I don’t know that they’ll be enthusiastic about Germany giving them instructions.”
Aussie Gains on Employment Report
The Aussie rose broadly after the Australian statistics bureau reported that Australian employers added 35,200 jobs in December. Most traders predict that the Reserve Bank of Australia will raise its present rate of 3.75 by a quarter of a percentage point.
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Euro Hits One Month High vs. Dollar
The euro rose to a one month high against the dollar and commodity linked currencies reversed previous losses. Previous losses were caused by investor concern over China’s monetary tightening policies but investors decided that the policies would not derail global economic recovery. Omer Esiner of Travelex Global Business Payments in Washington stated, “The reaction yesterday to China’s measures was a bit overstated, with the euro and most commodity currencies selling off. Today we are seeing a retracement of that move and the realization that the impact of the China’s bank moves won’t be so detrimental to the global growth scenario.” In early New York trading the euro rose to $1.4554, the highest since December 16th. In early European sessions the euro was pressured by data which showed that German economy contracted more than expected.
Fed Beige Book Report
The Japanese yen fell against major currencies and against the yen the dollar gained 0.4% trading at 91.34 yen. The Aussie gained 0.8% vs. the yen and traded at 84.35 yen. Investors are waiting for the release of the Fed’s ‘beige book’ which is it’s survey of economic conditions. In addition executives from major Wall Street firms are scheduled to testify at congressional hearings today. The US weekly unemployment and retail sales data are to be released Thursday. Sacha Tihanyi of Scotia Capital in Toronto said, “Any significant improvement (in the Beige Book reading) would be mildly bullish for the dollar in the current trading environment.”
Pound Rallies
The pound hit a one month high of $1.6285 after Bank of England policymaker Andrew Sentence said that the BOE may hold back on stimulus policies. Better than expected UK industrial production data also boosted the pound in currency markets. Adam Cole of the Royal Bank of Canada stated, “The comments from Sentance gave a sniff of a turn in the U.K. rate cycle, and that lifted the pound. It’s a bit premature in our view, but the comments moved the markets.”
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Dollar Falls vs. Euro
The US dollar posted its largest decline against the euro since November 2009 after last week’s jobs report dimmed hopes that the Fed will raise rates anytime soon. The euro gained 0.8% trading at $1.4538 after hovering around $1.4542 for the last three weeks. The Aussie hit a five week high vs. the US dollar as Chinese demand for Australian iron ore and coal was prompted by an unexpected increase in Chinese export numbers. Chris Turner of ING in London stated, “The global recovery story has received a shot in the arm with the quick rebound in Chinese exports. The Fed in no hurry to tighten, Asia is leading the global recovery so the dollar is weaker across the board.” This week brings the U.S. earnings season and data due includes, U.S. retail sales, industrial production and inflation data.
Euro Gains May be Limited
Many experts believe the Euro’s gains may be limited due to fiscal problems in some EU member nations. Ongoing fiscal problems in Greece combined with the threat of a Portuguese rating downgrade could limit the Euro’s recent gains. Remarks by St. Louis Federal Reserve Bank President James Bullard who said Fed rates are likely to remain at record lows for ‘quite some time’ pressured the dollar which sustained last week’s losses. Dag Muller of SEB in Stockholm stated, “The dollar went sour after the non-farm payrolls data. If the data didn’t meet expectations then it feeds the thought that there will be a prolonged period of time before the Fed hikes rates, which is what Bullard said. Stocks are higher too and oil is bid, which is another driver of a weaker dollar.”
Chinese Exports Boost Recovery Hopes
The unexpected rise in Chinese export numbers has spurred optimism for global recovery. Some experts see Asia as leading the global recovery. Chris Turner of ING in London said, “The global recovery story has received a shot in the arm with the quick rebound in Chinese exports. The Fed in no hurry to tighten, Asia is leading the global recovery so the dollar is weaker across the board.”
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Dollar Posts Losses Against Majors
The dismal figures posted by the US Labor Department sent the dollar downward in currency markets and stifled speculation that the Fed will cut rates anytime soon. The employment data showed that US employers cut an unexpected 85,000 jobs in December after revised November figures showed job gains of 4,000. The greenback posted its biggest loss against six major currencies in almost two months. The dollar pulled back from a four month high vs. the Japanese yen and the euro was on its way to its biggest one day gain against the dollar since November. During the past few trading sessions the dollar had rallied on the expectation that December’s jobs figures would follow November’s trend and the figures disappointed traders and investors. Samarjit Shankar of BNY Mellon in Boston said, “It was undoubtedly a disappointing number. It’s put a dent on rate hike expectations … and is a bit of a setback for investors who were looking for a relatively stable and smooth economic recovery. It’s put a dent on rate hike expectations … and is a bit of a setback for investors who were looking for a relatively stable and smooth economic recovery. The U.S. still has a weak labor market, and until that gets turned around, you are not going to have a sustainable recovery.”
Loonie Boosted by Rising Oil, Gold Prices
The Canadian dollar, affectionately called the ‘loonie,’ gained on the greenback as rising commodity prices bolstered the loonie. Canadian government bonds outperformed their US counterparts. Canadian bonds rose to 34 basis points for two year yields above similar US bonds. Higher oil and gold prices supported the loonie’s gains. For the week the Canadian dollar is up 1.9% against the US dollar. Against the euro the dollar fell as much as 0.9% trading at $1.4409.
Dollar Decline May be Short Lived
Some analysts expect the dollar’s decline to be short lived. Vassili Serebriakov of Wells Fargo stated, “The dollar has shown resilience. There were some mitigating factors. Should the damage to the dollar be limited in the aftermath of the report, that would be a positive sign for the greenback.”
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