Dollar Slumps on Fed Stimulus Hopes, Philadelphia Fed Gauge in Focus

Talking Points

• US Dollar Broadly Sold as Traders Revel in Fed Stimulus Expectations
• Spanish, French Bond Sale Results Eyed to Gauge Euro Funding Stress
• Risk Appetite May Falter if Philadelphia Fed Reading Dents QE3 Bets

The US Dollar slumped against its top counterparts after Federal Reserve Chairman Ben Bernanke concluded two days of Congressional testimony, with markets seizing on comments reiterating the central bank is prepared to do more to stimulate growth if necessary. While this is not materially different from familiar rhetoric employed over recent months, the slightly softer tone of the Beige Book regional economic conditions survey seemed to be taken to mean a QE3 program was becoming more likely. Bernanke offered a run-down of alternative easing options including discount-window lending or a decrease in the interest rate paid on bank reserves and said the Fed is studying the likely permanence of the recent slowdown, which may have reinforced hopes for a dovish policy shift.

Looking ahead, a quiet European data calendar puts the focus on a pair of Spanish and French bond auctions. Madrid will sell a tranche of 2014, 2017 and 2019 debt. France will offer 2015, 2016 and 2017 paper as well as inflation-linked 2019, 2022 and 2040 bonds. Trades will look to average yield and bid-to-cover readings for a gauge of sovereign stress in the Euro area before tomorrow’s Eurogroup conference call, where policymakers are expected to pave the way for disbursement of the first €30 billion of Spain’s bank sector bailout by month-end.

The spotlight then shifts to the Philadelphia Fed gauge of US business confidence, where expectations point to a mild improvement in July after setting a 10-month low in June. An upside surprise along the lines of the Empire Manufacturing print earlier in the week may dent Fed stimulus bets amid evidence of stabilization early in the second quarter, boosting the greenback. S&P 500 stock index futures are pointing cautiously higher however, warning a risk-on tone may carry forward to spell trouble for the benchmark currency.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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