Another round of hawkish comments by government and Fed officials strengthened the US dollar against all of the major currencies, except for the Canadian dollar. The greenback picked up its biggest gains against the euro as it fell nearly 200 points to test 1.5450, and was followed by the British pound as the pair eased just below 1.9550. The high yielding Australian dollar slide to 0.9463, while the New Zealand dollar continued to rack up losses as it slipped to trade at 0.753 against the greenback. On the other side of the spectrum, the low yielding Japanese yen fell to a three month low against the greenback as USD/JPY rose to 107.3. Finally, the Swiss franc dropped nearly 150 points as the USD/CHF pair rose to 1.042.
At the Boston Fed Conference late last night, Fed Chairman Bernanke reinforced the idea that the US economy no longer faces ‘substantial’ downside growth risks, and relayed his commitment to ‘strongly resist’ upside risks for long-term inflation expectations. Treasury Secretary Henry Paulson also expressed his support for a strong US dollar as he stated that an intervention in the currency will always remain as a tool for US officials. On the economic front, the US trade deficit grew more than expected due to rising import costs, and widened to -$60.9B from a revised -$56.5B in March. Rising gas prices paired with record high unemployment led the IBD/TIPP Economic Optimism index to fall to 37.4 from 40.3 in May, and remains well below the average reading of 52.1.
Downbeat economic data spurred mixed sentiment in the stock markets, with Chairman Bernanke’s hawkish tone adding to the mix as the markets raised bets that the Fed will look to increase the benchmark interest later this year. As a result, the DJIA rose a meager 9.44 points to 12,289.76 points, with Coca Cola picking up the biggest gains out of the big 30. The broader S&p500 lost 3.32 points to hold off at 1,358.44 points, with 385 stocks plummeting to a new 52 week low.
Expectations of a rate hike later this year boosted bond yields today, with mounting inflationary concerns limiting demands for US Treasuries. As a result, the benchmark 10-Year yield rose to 4.111 percent from 4.029 percent, while the 2-Year yield surged to 2.925 percent from 2.727 percent.
Looking ahead, we expect hawkish comments from Fed’s Kohn and Bullard tomorrow, and anticipate that the Fed’s Beige Book could support a US dollar rally as the central bank’s 12 districts continue to note upside inflation risks.
