US Dollar and Fed Policy - Perception vs. Reality

DailyFX

The US Dollar tumbled in overnight trade after Ben Bernanke clarified the Fed’s intentions to “taper” QE asset purchases. More of the same is expected ahead.

Talking Points

  • US Dollar Tumbles as Bernanke Reins in QE “Taper” Speculation
  • Buoyant Risk Appetite Points to Continued Dollar Selling Ahead

The US Dollar tumbled in overnight trade, losing as much as 1.5 percent on average against its top counterparts, as Asian markets responded to yesterday’s “dovish” commentary from Federal Reserve Chairman Ben Bernanke. The central bank chief pushed back against speculation about a near-term reduction of QE, reminding investors that the “overall thrust” of policy remains highly accommodative. Bernanke added that inflation and job growth trends signal that more Fed stimulus is needed.

Minutes from June’s FOMC policy meeting seem to illuminate the impetus behind the Fed Chairman’s tone. Officials debated including specific language about the fate of the asset purchase program in the policy statement but ultimately felt it was too difficult to “convey succinctly the desired information.” As such, much of the discussion focused on how Bernanke ought to explain the central bank’s intentions in the press conference following the sit-down, with most participants stressing that he should:

  1. Make clear that any changes to the asset purchase program remained highly conditional on an ongoing assessment of the economic outlook.
  2. Strike a clear distinction between “tapering” and “tightening”, stressing that there is likely to be a significant time lag between the end of QE and an increase in the benchmark lending rate.

In retrospect, those FOMC members who feared that “stating an intention to slow the pace of asset purchases...might be misinterpreted as…the initial step toward exit from the [Fed’s] highly accommodative policy stance” proved correct.Indeed, the mass liquidation of QE-linked bets in the aftermath of June’s FOMC meeting suggests the markets interpreted the Fed’s posture as having shifted significantly toward the hawkish side of the spectrum.

With that in mind, today’s comments from Mr Bernanke represent not an about-face in the Fed’s thinking but an attempt to realign the markets’ perceptions. The reality of the Fed’s intentions has not changed, but volatility in asset prices since Bernanke spoke shows that the markets’ perception of those intentions is undergoing significant reassessment.

More of the same seems likely to ahead. European shares are on racing higher in early morning trade and S&P 500 futures are up by nearly a full percentage point as traders cheer the prospect of longer-lasting Fed support. A quiet economic calendar offers little that can derail momentum, pointing to continued US Dollar weakness ahead.

Capitalize on Shifts in Market Mood with the DailyFX Speculative Sentiment Index

Asia Session:

GMT

CCY

EVENT

ACT

EXP

PREV

22:30

NZD

Business NZ PMI (JUN)

54.7

-

59.0

22:45

NZD

Food Prices (MoM) (JUN)

2.1%

-

0.3%

23:50

JPY

Machine Orders (YoY) (MAY)

16.5%

3.3%

-1.1%

23:50

JPY

Machine Orders (MoM) (MAY)

10.5%

1.9%

-8.8%

1:00

AUD

Consumer Inflation Expectation (JUL)

2.6%

-

2.3%

1:30

AUD

Employment Change (JUN)

10.3K

0.0K

-0.7K

1:30

AUD

Unemployment Rate (JUN)

5.7%

5.6%

5.6%

1:30

AUD

Participation Rate (JUN)

65.3%

65.2%

65.2%

1:30

AUD

Full Time Employment Change (JUN)

-4.4K

-

-6.8K

1:30

AUD

Part Time Employment Change (JUN)

14.8K

-

6.1K

2:00

JPY

Tokyo Avg Office Vacancies (%) (JUN)

8.46

-

8.33

2:47

JPY

Bank of Japan Rate Decision

0.10%

0.10%

0.10%

2:47

JPY

BOJ 2014 Monetary Base Target

¥270T

¥270T

¥270T

Euro Session:

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

6:00

EUR

German Wholesale Price Index (YoY)

0.7% (A)

-0.1%

Low

6:00

EUR

German Wholesale Price Index (MoM)

-0.4% (A)

-0.4%

Low

6:30

JPY

BOJ’s Kuroda Holds Press Conference

-

-

High

8:00

EUR

ECB Publishes Monthly Report

-

-

Medium

Critical Levels:

CCY

SUPPORT

RESISTANCE

EURUSD

1.2834

1.3128

GBPUSD

1.4900

1.5132

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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