As indicated in yesterday's afternoon commentary, don't mistake the rally in the U.S. dollar for renewed optimism in the U.S. economy. For many reasons, the recovery in the greenback was expected to be temporary and this morning we have seen the dollar give up its gains against the euro while extending to a fresh low against the Swiss Franc. Fed Chairman Ben Bernanke is delivering a speech at 3:45pm NY Time this afternoon and investors will be listening in closely to see if the central bank was caught off guard by the jobs number on Friday. If Bernanke emphasizes the weakness of the labor market and uses it as a justification to keep monetary policy easy, further in losses in the dollar is likely. Alternatively, the dollar could rally if he expresses any skepticism about the jobs number and indicates a desire to see a few more months worth of data before altering monetary policy. According to Fed President Fisher, who is a voting member of the FOMC, there is no need to be overly concerned about the outlook for the U.S. economy and the labor market. He expects the economy to grow by more than 3 percent in the second half of the year which suggests that he expects the pull back in the labor market to be temporarily. While maintaining an upbeat attitude, Fisher told us that in his opinion, "there is no need for QE3" and QE2 will be over in June which basically means that jobs number has not affected the central bank's plans to end asset purchases this month.
Investors around the world are worried about the outlook for the U.S. dollar and few have stepped up as buyers. However central banks that maintain a currency peg are forced to buy dollars to prevent their currency from rising too rapidly in value and they too are becoming very worried about their exposure to the greenback. A FX official from China warned this morning of the risks in excessive holdings of U.S. dollars and their concern reflects their desire for more diversification.
In the meantime, short term rates and Eurozone economic data suggests that ECB President Trichet will signal a rate hike in July and we expect market positioning in the EUR/USD to continue to account for that.