Fed Chairman Ben Bernanke unexpectedly moved markets this afternoon in Boston during a Q&A about economic policy. Although expectations were light for session, the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) took back gains made over the past six days in just a few minutes.
Striking a much more dovish tone compared to comments delivered on June 19th in the FOMC rate decision, Mr. Bernanke stated that the Fed has shifted towards a ‘forecast-based’ policy. He also reiterated that the Fed’s employment mandate had not been met and 6.5% unemployment is a threshold, not a trigger, for any reduction in asset purchases.
Although the chairman expects inflation to ‘come back up,’ he warned of the dangers that falling inflation may pose to an economy. Bernanke said he saw signs of tightening financial conditions citing various risk factors in the global economy.
Dow Jones-FXCM U.S. Dollar Index (ticker: USDOLLAR) 30-Minute Chart
Chart - Created Using FXCM Marketscope 2.0
Across the board, the Dollar faced pressure as it lost ground against the Euro (-1.10%), Franc (-0.79%), Yen (-0.81%) and Aussie (-1.22%) following the dovish comments.
This comes at a time where the greenback has gained almost 5% since the June 19th meeting when talk of a September taper began to appear possible. Although these statements come as a surprise to those judging the recent Nonfarm Payrolls data as a bullish indication of US growth, recent developments in Europe and China may have contributed to a less hawkish tone this time around with the chairman.
Earlier, China import and export data on Wednesday came in sharply below expectations and President Cavaco of Portugal indicated today that early elections may lead to a need for a new bailout.
Global economic headwinds like these make estimating a timeline for the data increasingly more difficult. As the Fed looks for good economic data points to direct the ‘forecast-based’ policy, negative prints from abroad may begin to have a greater impact on longer-term forecasts.
Our currency forecasts currently favor a weaker US Dollar through near-term trading. Bernanke’s commentary only helps further solidify calls for a lower USD.
Written by Gregory Marks, DailyFX Research Team