The U.S. Dollar finished lower against most major currencies, driven by the dovish testimony of Fed Chairman Bernanke. In addition to commenting on the direction of interest rates, Bernanke also emphasized that the economic recovery was still sluggish because of the floundering labor market.
Testifying before the Joint Economic Committee, Bernanke reiterated the Fed’s stance that interest rates would remain low for an “extended period.” He also said that “the income data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarter.” Finally, he added that “significant restraints on the pace of the recovery remain including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments.”
All of this added up to the perception of a weaker Dollar. The tone of Bernanke’s comments encouraged hawkish traders to lighten up on their long Dollar positions.
Prior to the Bernanke testimony, the U.S. Dollar strengthened a little following a better than expected Retail Sales Report. This report was another sign that the consumer was helping the economy to recover, but the strength it generated was short-lived due to the Bernanke comments.
Bernanke’s testimony put the dismal Greek financial situation on the back-burner for at least a day. The EUR USD struggled early but was able to drift higher throughout the trading session due to expectations of lower U.S. interest rates for a prolonged period. Traders weren’t putting too much confidence in the rally as most expect the hedge funds to aggressively sell the rally on any hint of problems in Greece.
Gains in the British Pound were attributed to lower U.S. interest rates and an improving U.K. economy although political concerns because of the May election may have capped the rally.
Despite the stronger equity markets and a pick-up in demand for higher yielding assets, the USD JPY was under pressure after failing to penetrate a key 50% retracement level at 93.67. The Dollar/Yen has been under pressure since last week’s closing price reversal top at 94.77. The daily chart indicates that this market is set up for a retracement to 92.26. Technical factors as well as a clash between the government and the Bank of Canada are helping to hold this market in tight range.
Increased demand for higher yielding assets helped to boost the Canadian Dollar, Australian Dollar and New Zealand Dollar.
The Canadian Dollar made a new high for the year, fueled by higher equities and commodities, and extended its gain once Bernanke said interest rates would remain low. Canadian financial traders have increased bets of a rate hike on June 1, rather than July 1. Coupled with the Bernanke comments, this is bearish news for the USD CAD because it will help widen the interest rate differential.
The Australian Dollar rebounded after a two-day setback on increased demand for higher yielding assets. The New Zealand Dollar rallied for the same reason as well as a technical factor. Regaining and holding above a key 50% level at .7124 helped to push this market higher.
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