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.”

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.

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.”

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.”

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.”

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.”

Rising Equities Spark Optimism

Rising equities have lifted higher yielding currencies such as the euro and the Aussie and Kiwi dollars. Trading volumes were thin due to years end and holidays and analysts were loath to draw conclusions based on recent trading. European stocks rose 0.3% prompting year end investor optimism. Christian Lawrence of RBC Capital Markets stated, “With so little in the way of data and not many people around the market has gone back to what it is familiar with and is trading on the back of stronger risk appetite, which is pushing the euro and higher-yielding currencies higher.” Investors showed little reaction to the Fed’s plan to create a “term deposit facility” designed to help the Fed withdraw money from the US banking system when the Fed decides to tighten monetary policies.

Fed Rate Speculation

Investors are waiting for U.S. consumer confidence figures for December and the Standard & Poor’s Case-Shiller home price index for October. Most experts expect the figures to show continuing signs of US recovery. Despite repeated statements by the Fed that interest rates will remain low for an ‘extended period’ many are speculating that the Fed may raise rates sooner than expected. Johan Javeus of SEB currency strategist in Stockholm said, “Anything that points in the direction of the Federal Reserve raising interest rates earlier than previously thought will support the dollar — there has been no indication of this from the Fed but U.S. data recently has been coming in on the strong side.”

Dollar at Two Month High vs. Yen

The dollar rose to a two month high against the Japanese yen as speculation increased that the Federal Reserve will withdraw stimulus measures sooner than expected. The dollar advanced 0.4% against the yen trading at 91.99. Japanese data was limited as many companies close for year end holidays. In recent trading the dollar has risen broadly on optimism that the US economy will continue to recover in 2010.

Slight Dollar Dip vs. Euro

In early Asian trading the US dollar dipped slightly against the euro but the dollar remains near a three month high against the euro. Stronger US employment figures, the Fed’s positive assessment and higher retail sales data have all combined to boost the dollar in currency markets. Masafumi Yamamoto of Barclays Capital in Japan stated, “The dollar may extend gains a little more as momentum buyers could chase the dollar up while it stays in an uptrend. But gains are likely to slow down, unlike what we saw last week, because many dollar-short positions have already been neutralised by now, and short positions in the euro on the other hand are growing.”

Euro Pressured by EU Banking, Debt Woes

The euro has been pressured by EU banking woes and last week the ECB increased its estimate of euro zone bank writedowns. Euro gains were also capped after ECB Vice President Lucas Papademos said the ECB will not change its plans to tighten collateral rules even if Greek sovereign debt ratings fall below the required A- standard. The euro gained a mere 0.1% against the dollar and traded at $1.4350. Many currency experts are wondering if markets will continue to support the dollar on positive US data or whether optimistic news will prompt investors to sell the dollar in favor of high yielding assets.

Aussie, Kiwi Take Big Hits

Recent big winners, the Aussie and Kiwi dollars fell in global currency markets. The Aussie continued the worst weekly performance among the most traded currencies. The Kiwi hit a one week low but this may be limited due to an expected report that will show that the New Zealand economy grew 0.4% in the third quarter. Khoon Goh of ANZ National Bank Ltd stated, “The markets will now look for any good economic data coming out of the U.S. as potentially signaling earlier Fed rate hikes. The key risk facing the Australian and New Zealand currencies is whether or not the U.S. dollar rally has further to extend.”

Pound Reverses Recent Decline

The pound reversed its recent decline against the euro and the yen as UK inflation data weakened arguments that the Bank of England should keep rates at historic lows. UK inflation data was “slightly stronger than expected” according to currency strategist at Barclays Capital in London. U.K. Chancellor of the Exchequer Alistair Darling said that the UK inflation rate is expected to reach about 3% in 2010. On December 10th the Bank of England left rates at 0.5% and kept its bond purchase program at 200 billion pounds. ($326 billion USD) UK Policymaker Kate Barker said she is cautious about increasing the bond purchase program calling the UK economy “bumpy and uneven.” She also stated, “There are reasons to think you wouldn’t want asset prices to go up too far. For me, there’s a bit of caution about how much further I’d like to take the policy.”

Euro Pressured by Austrian Banking Concerns

The euro was pressured by Austrian banking woes which came on the heels of recent Greek fiscal concerns. The Austrian press reported that the country’s central bank and its financial market regulator have put the country’s top cooperative bank on a watchlist. A spokesman for Oesterreichische Volksbanken said the bank is not at risk of nationalization and that the reports were inaccurate. The report prompted concerns about the health of the EU’s banking sector. Earlier in the week the announcement of the $10 billion dollar bailout for Dubai had eased banking concerns. Many European banks are heavily exposed to Dubai debt.

Lingering Greek Fiscal Concerns

Greek fiscal concerns remain despite the announcement of spending cuts by Greek Prime Minister George Papandreou. Tomohiro Nishida of Chuo Mitsui Trust and Banking company stated, “Persistent concerns about sovereign risk in Europe such as those in Greece and softer stock markets are lending support to the dollar.” Investors are waiting for the results of the Fed meeting taking place today and Wednesday.

Dubai Bailout

The euro rose and the Japanese yen fell on news that Dubai had received a $10 billion dollar bailout from Abu Dhabi to enable the country to pay a $4.1 billion Islamic bond which matures on Monday. Last month the news that the Dubai government holding company Dubai World may default on its debts sent shockwaves through global markets. The news of the bailout lifted risk sentiment in global markets. Jun Kato of Shinkin Central Bank Research Institute in Tokyo stated, “The announcement eased concerns about the Dubai debt troubles to some degree, but it will likely be temporary and the positive impact on stock and currency markets seems to be short-lived.” In November the yen had benefited when Dubai worries were at their height as investors sought safe haven assets. The yen is widely used to fund carry trades and usually rises on risk aversion.

Euro Gains Likely to be Capped

Currency analysts said the euro benefited from the bailout but said gains were likely to be capped due to market liquidity decreases in advance of years end. Kasper Kirkegaard of Danske Markets in Copenhagen stated, “The Abu Dhabi news helped risk sentiment, boosting the euro. The yen suffered from a squeeze (in long yen positions). But we should be careful; the markets are thinning out so we could see some volatile moves.”

Euro Zone Data

Euro Zone economic data released Monday showed euro zone industrial production in October and rising unemployment. European Union statistics office Eurostat said that the euro experienced a month to month fall of 0.6% and a year on year decline of 11.1%. Some economists say that decreased industrial production indicates that euro zone recovery may be prolonged and weak. European Union statistics office Eurostat said of ING stated, “The marked relapse in industrial production in October is a sobering reminder of the fragility of the economic recovery in the euro zone,”