Wednesday, 24 Feb 2010

Dollar Weakens Prior to Bernanke's Testimony

The dollar gave back some of its appreciation at lunchtime today during the European trading session. The volatility in the greenback's major crosses can be considered as profit taking by traders who were long on the dollar during yesterday's trading.

Currently the EUR/USD is trading at 1.3544 and is relatively unchanged from its opening price. The USD/JPY is lower at 90.04, from an earlier price of 90.18. Spot crude oil has dropped to $78.60 from $79.15.

Yesterday the dollar strengthened on all fronts as German business sentiment fell unexpectedly and U.S. consumer confidence was also considerably lower. This negative economic news hit equities hard and in turn helped to push the dollar higher. Spot gold also fell sharply, trading lower by $8.

Traders this afternoon will be focused on Federal Reserve Chairman Ben Bernanke. The Fed chief is due to testify before congress on the economy and U.S. monetary policy.

We expect the dollar to strengthen after Bernanke's speech. The topic of interest rates will be discussed, but we would like to point out that the first step the Fed may take will be to wind down the quantitative easing programs it enacted during the financial crisis. This should take place prior to any adjustment to the Fed Funds rate. As such, the dollar could strengthen for the second consecutive day. The EUR/USD could extend its bearish move to the support line of 1.3496.