Ever since the St. Patrick’s Day market rout, the beaten down U.S. Dollar has been quietly on the rebound.
Hawkish talk out of the Fed recently has only helped to boost the greenback even as their European counterparts continue to talk a good game of rate hikes of their own.
In short, it has been a giant game of chicken between the central banks to see who is serious about raising rates —Europe or the U.S.
In the balance naturally has been the greenback.
It rises and falls daily against the Euro depending on who the market believes is telling the truth.
But with all signs now pointing to a deeper economic downtrend in Europe, the hawkish talk out of the European Central Bank (ECB) may just be a bit of a bluff.
That’s because without some sort of easing of monetary policy, the economies of Italy, Spain, Portugal, and Greece will continue to falter. None of them are helped by either the strong currency or the high interest rates.
What’s at stake, of course, is the strength of Euroland itself. This then is its first major test—the Union itself is in the balance.
So here’s a guess that the ECB will blink first and back off of its hawkish tone.
Meanwhile, judging from the comments out of the Fed lately, they are practically screaming to the markets that the rate cutting cycle is over. That’s a big win win for the battered dollar.
Here’s the latest skinny on the greenback.
From Bloomberg by Bo Nielsen and Ye Xie entitled: Dollar Gains Most Since 2005 as Bernanke Says Growth Risk Fades
“The dollar headed for the biggest two-day gain against the euro since 2005 after Federal Reserve Chairman Ben S. Bernanke said economic risks have faded, spurring traders to boost wagers interest rates will rise.
The U.S. currency rose to a three-month high against the yen after Bernanke said late yesterday that the central bank will “strongly resist” any waning of public confidence in stable prices. “Strong” economic fundamentals will translate to dollar strength, Treasury Secretary Henry Paulson said today in a Bloomberg Television interview in Washington.
Policy makers are trying to “dispel this notion in the market that the U.S. has a policy of benign neglect to the dollar,” said Sophia Drossos, a currency strategist in New York at Morgan Stanley, in an interview on Bloomberg Television. “They are making it very clear that the benefits of a weak dollar are far outweighed by the costs.”
Futures on the Chicago Board of Trade show a 52 percent chance the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 31 percent the previous day. The contracts show a 96 percent chance the Fed will increase the rate by December, up from 67 percent odds a week ago.
“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” Bernanke said in a speech at a Boston Fed conference. “The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.”
The Fed is “aware” that the weak dollar boosts inflation, Dallas Fed President Richard Fisher said in response to questions after a speech at the Council on Foreign Relations in New York today. Paulson repeated comments made yesterday that currency intervention is a tool for policy makers.
‘You are going to see the dollar rally over the next 12 months,” said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc. in an interview with Bloomberg Television. “Global investors are quite underweight the U.S. You could see the beginning of a real reversal of that'”
By the way here is a year to date chart of the dollar. A dollar rally is a welcomed sight.