THE TAKEAWAY: Federal Reserve Chairman Bernanke’s Semiannual Monetary Policy Report to the Congress > Dovish Commentary Suggests Further Easing > U.S. Dollar Bearish
The U.S. Dollar plummeted against a basket of currencies at 14:00 GMT as Federal Reserve Chairman Ben Bernanke began his testimony at the Semiannual Monetary Policy Report to the Congress, in which it was evidently clear that the Federal Reserve was ready to continue its loose monetary policy – and thus further devalue the U.S. Dollar – in order to boost growth prospects for the U.S. economy.
In his discussion of current economic conditions, Chairman Bernanke noted that the pace of expansion so far this year has “been modest” in the United States, with real gross domestic product having risen at “about a 2 percent rate in the first quarter of this year, and incoming data suggest that the pace of recovery remained soft in the spring.” Similarly, the unemployment rate, which had been “on a downward trajectory at the turn of the year, has moved back above 9 percent.”
Indeed, Chairman Bernanke noted, that “[T]he most recent data attest to the continuing weakness of the labor market: The unemployment rate increased to 9.2 percent in June, and gains in nonfarm payroll employment were below expectations for a second month.” Furthermore, he stated that long-term unemployment is a potentially severe problem for the country, as it leads to “an erosion of skills of those without work,” while simultaneously reducing “the productive potential of our economy as a whole.”
Dow Jones FXCM Dollar Index 1-minute Chart: July 13, 2011
Charts created using Strategy Trader– Prepared by Christopher Vecchio
Following the release, the Dow Jones FXCM Dollar Index fell sharply as markets dissected the information as U.S. Dollar-bearish, and thus stoking risk-appetite; U.S. equity markets jumped on the news. Indeed, the overall dovish tone of the report boosted risk-appetite, as further loose monetary policy could allow for a further depreciation of the U.S. Dollar, which has depreciated against every major currency since the second round of quantitative easing started in November. The index dropped from 9642.52 to a session low, at 9599.53, within moments after the prepared statements were released. The index was trading at a new session low of 9597.19 at the time this report was written.
In regards to other comments made by Chairman Bernanke about the economic state of the country, the head of the Federal Reserve stated that “much of the slowdown in aggregate demand this year has been centered in the household sector,” which posses a momentous issue for future growth, as consumption accounts for nearly 70 percent of the aggregate gross domestic product figure. Likewise, the continued struggle by the housing sector regain footing “is holding down household wealth and weighing on consumer sentiment,” further preventing a recovery in consumption.
Written by Christopher Vecchio, Currency Analyst
To contact the author of this report or be added to his distribution list, please send inquiries to: firstname.lastname@example.org
Follow Christopher Vecchio on Twitter: @CVecchioFX