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US Dollar, Japanese Yen Surge as Geithner's Lack of Clear Policy Actions Stoke Risk Aversion

Tuesday, 10 February 2009 13:56:22 GMT  |  Terri Belkas, Currency Strategist

The US dollar and Japanese yen rocketed higher on Tuesday due to a jump in risk aversion, a threat that has continued to linger in the markets for months. The driver? Comments by Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke failed to suggest that a quick fix for the woes in the credit market was in the works. The reality of the situation is that there is no silver bullet to reverse the damage done to the financial markets, and instead, it will take a significant amount of time to even begin to see a semblance of true stability. Indeed, Mr. Geithner's speech provided more of a broad outline for policy actions, rather than clear cut plans.

The first goal was to enact regulations in which banking institutions would have to go through comprehensive stress tests and would subsequently receive capital if needed with a facility that uses funds from the Treasury as a “bridge to private capital.” The second goal was to establish a Public-Private Investment Fund, which would target toxic assets and provide a mechanism for valuing them. The third goal was to expand the Federal Reserve’s Term Asset Backed Securities Loan Facility (TALF) in order to create the Consumer and Business Lending Initiative, which should lower borrowing costs and improve access to small business lending, student loans, consumer and auto finance, and commercial mortgages. Finally, Mr. Geithner said that President Obama’s economic team will formulate and announce a comprehensive plan to address the housing crisis over the next few weeks. Meanwhile, Mr. Bernanke's speech focused primarily on the Federal Reserve’s efforts to improve transparency of their various lending facilities, but there was little in the way of new information announced.

Looking ahead, a series of speeches and testimony are scheduled for Wednesday starting with Federal Open Market Committee (FOMC) Governor Elizabeth Duke at 9:50 ET, who will speak in New York on stabilizing the housing market. At 10:00 ET, Treasury Secretary Timothy Geithner will testify on TARP in front of the Senate Budget Panel. At 13:00 ET, Chicago Fed President Charles Evans will speak on the US economic outlook. For the most part, comments by these individuals should be innocuous for price action in the forex markets. However, any sort of biased commentary or extreme opinions on the outlook for the economy has the potential to impact risk sentiment and thus forex carry trades, with improved risk appetite likely to weigh on the US dollar and Japanese yen while benefiting high-yielding currencies like the Australian dollar and New Zealand dollar.

Related Article: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast


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