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USD Rallies after Bernanke Comes Up Empty

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To the disappointment of many investors who had been hoping for more aggressive action by the U.S. central bank, the Federal Reserve came up empty by failing to signal any new steps to stimulate the U.S. economy. In response, the dollar rallied against all of the high yielding currencies as traders unwound their pre-QE3 trades. Even though Bernanke acknowledged the sluggish pace of the U.S. recovery, he sounded blindly optimistic when he said that growth and fundamentals have not been altered by recent shocks. In fact, he added that the Fed holds an optimistic view of prospects for U.S. growth and expects the recovery to strengthen over time. This blind optimism shows just how limited the Fed's options really are. Aside from putting up a confident front, the central bank, in Bernanke's own words has a "limited ability to ensure long-run growth." There are still a few bullets left such as extending their 2013 pledge to their securities portfolio, implementing Operation Twist, lowering the interest rate on reserves or announcing another round of asset purchases, but these options may not do much other than keep yields low.

As a result the pressure is still on for the Federal Reserve to do more. Inflation is high but ignoring growth at the expense of prices could be a risky bet for the Fed. If the central bank focuses too much on price pressures, the U.S. could turn into Japan - where zero growth is met with zero inflation. If that happens, the mood in the U.S. would sour more than it already has, creating an even bigger hole for the Federal Reserve to dig themselves out of. The U.S. economy still desperately needs a jolt of stimulus and the next Fed meeting on September 20th could be an opportunity for the central bank do so. Bernanke announced that he is tacking on an extra day to the September FOMC meeting to allow for a fuller discussion of tools. Yet they may still prefer to wait until November because that would buy them more time. A press conference will not be held after the September meeting but one is scheduled for after the November FOMC meeting which would give him an opportunity to explain the decision. Either way, the door is still open for more stimulus and we expect the Fed to walk through it before the end of the year.

Meanwhile this morning's U.S. GDP numbers showed the extent of weakness in the U.S. economy, which expanded by only 1.0 percent in the second quarter. When the initial growth numbers were released, it was reported that the economy grew by 1.3 percent and the downward revision indicates that growth was weaker than initially estimated. Unfortunately this happens to be the story of the U.S. economy - job losses were revised higher when the labor department released their annual statistics while growth was revised lower. The recovery is losing momentum and is coming from an even weaker base. Thankfully the details of the report contained some silver linings - personal consumption was revised higher along with the GDP price index. The University of Michigan consumer sentiment survey was also revised up to 55.7 from 54.9 for the month of August. Confidence was initially reported to have fallen to a 3 decade low but with the revision, it is now only at a 2.5 year low. If economic data continues to deteriorate, the Fed could be pushed into action sooner rather than later. Expect the dollar to hold onto its gains throughout the NY session and for the EUR/USD to make a run for 1.4315.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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