The U.S. Dollar rose overnight after Fed Chairman Bernanke said the central bank is ready to tighten monetary policy once the economy has “improve sufficiently.”
Bernanke also added “We will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”
The central bank Chairman’s comments led investors to take some money off the table ahead the long week-end. The U.S. Dollar index rebounded slightly from its weekly low as the news affected currencies across the board. Bernanke’s comments are having a similar effect as a verbal intervention.
Bernanke’s comments are putting pressure on the December Euro overnight as they increase the appeal of U.S. assets. Yesterday the European Central Bank announced it would leave interest rates at 1.0%. In addition, in its statement, the ECB implied that the economic recovery in the Euro Zone would be rocky.
The December British Pound is feeling pressure overnight following Fed Chairman Bernanke’s hawkish comments. Traders are taking profits following the recent run-up in the British Pound on the perception that Bernanke’s comments indicate that the U.K. economy may be one of the last to mount an economic recovery.
The U.S. Dollar rallied sharply overnight versus the December Japanese Yen as traders are interpreting Fed Chairman Bernanke’s comments as a sign the Japanese economy is still among the weakest. A recovery in the U.S. economy would drive up U.S. interest rates which would force traders to treat the Japanese Yen as a carry currency once again.
Long-traders are taking profits in the December Swiss Franc following a week of strong gains. Although Bernanke’s comments are not a call for action at this time, they clarify the fact that the Fed will be willing to act swiftly if economic conditions improve. This is seen as supportive for the Dollar. Traders are reacting by paring the size of their long Swiss Franc positions.
Bernanke’s hawkish statement is having a negative effect on higher risk assets including U.S. equity markets and crude oil prices. This is triggering a profit-taking break in the December Canadian Dollar. Pressure from lower crude oil prices because of increased supply could limit gains in the Canadian Dollar during the upcoming week.
U.S. equity markets are called slightly lower this morning based on a weaker overnight trade. Yesterday, it looked as if the stock markets were in a position to test their highs for the year, but the Bernanke comments seemed to have stopped the rallies in their tracks. Investors now have to factor in the possibility of a tight monetary policy into their investment plans. Traders may pare positions today ahead of the long week-end.
U.S. Treasury markets reacted by selling off following Bernanke’s call for higher interest rates and a tightening of its monetary policy. Bernanke’s comments were a surprise to traders who had grown content with the Fed keeping interest rates at near record low levels for some time. In addition to Bernanke’s bearish comments, yesterday’s $12 billion auction of 30-year bonds drew a weaker-than-average demand. More talk of higher interest rates could put pressure on T-Bonds and T-Notes today, but losses could be limited if there is a substantial sell-off in U.S. equity markets.
The stronger Dollar is pressuring December Gold in thin overnight trading. Bernanke’s comments about the possibility of higher interest rates should encourage some traders to take money off the table following the strong rise in gold prices this week. This is because the market has been rallying on the notion that a prolonged period of lower U.S. interest rates will weaken the U.S. Dollar.
Look for bearish supply/demand factors to continue to exert downside pressure on December Crude Oil. Too much supply and slow demand are expected to continue to keep a lid on rallies in the short-run. Longer-term traders are citing the International Energy Agency’s forecast of an increase in global oil demand for 2010 as a potentially bullish factor. This forecast could help limit losses. Continue to look for crude oil to remain in a $10 range with a slight bias to the downside.
The weaker Dollar is helping to increase demand for grain, driving up December Wheat prices. Talk of a damaging frost has provided some support for soybeans and corn this week, but today’s USDA supply/demand report could put a lid on a substantial rally. The USDA is looking for a record soybean harvest and the second largest corn crop in history.
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