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Euro Tanks, U.S. Dollar Surges on Bernanke Testimony

Euro Tanks, U.S. Dollar Surges on Bernanke Testimony

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: [Fed Chairman Bernanke’s Semi-Annual Testimony ] > [Committee Critical of Dual-Mandate; Bernanke Less Dovish] > [USDollar Bullish]

Federal Reserve Chairman Ben Bernanke was on Capitol Hill today testifying in front of the Committee on Financial Services. Despite overall dovish undertones, the chairman’s testimony was markedly less-dovish than recent Federal Reserve communiqués, boosting the U.S. Dollar across the board.

At the time this report was written, the EURUSD had taken a dramatic spill, falling from 1.3460 to as low as 1.3370, at the time this report was written. Similar price action was observed across other U.S. Dollar-based pairs, in particular the AUDUSD and NZDUSD.The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher on the developments, from 9740.41 to as high as 9809.01.

EURUSD 1-min Chart: February 29, 2012

Euro_Tanks_U.S._Dollar_Surges_on_Bernanke_Testimony1_body_Picture_2.png, Euro Tanks, U.S. Dollar Surges on Bernanke Testimony

Charts Created using Marketscope – Prepared by Christopher Vecchio

Chairman Bernanke, in his semi-annual testimony, noted that “the recovery of the U.S. economy continues, but the pace of expansion ‘has been uneven and modest’ by historical standards.” Going forward, the Federal Open Market Committee projects “growth in real GDP in 2012 [with] a central tendency of 2.2 to 2.7 percent, which are considerably lower than the proejctions made last June.”

In regards to unemployment, the chairman said that the “decline in the unemployment rate over the past year has been ‘more rapid’ than expected.” However, as he noted, “the job market remains far from normal…The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high.”

Presented below without commentary are other notes from the testimony:

On Economic Conditions

  • Private payroll employment has increased by 165,000 jobs per month on average since the middle of last year, and nearly 260,000 new private-sector jobs were added in January.
  • The job gains in recent months have been relatively widespread across industries. In the public sector, by contrast, layoffs by state and local governments have continued.
  • The unemployment rate hovered around 9 percent for much of last year but has moved down appreciably since September, reaching 8.3 percent in January. New claims for unemployment insurance benefits have also moderated.
  • Household spending advanced moderately in the second half of last year, boosted by a fourth-quarter surge in motor vehicle purchases that was facilitated by an easing of constraints on supply related to the earthquake in Japan.
  • In the housing sector, affordability has increased dramatically as a result of the decline in house prices and historically low interest rates on conventional mortgages.
  • On the supply side of the market, about 30 percent of recent home sales have consisted of foreclosed or distressed properties, and home vacancy rates remain high, putting downward pressure on house prices.
  • Manufacturing production has increased 15 percent since the trough of the recession and has posted solid gains since the middle of last year, supported by the recovery in motor vehicle supply chains and ongoing increases in business investment and exports.

On Monetary Conditions

  • The target range for the federal funds rate remains at 0 to 1/4 percent, and the forward guidance language in the FOMC policy statement provides an indication of how long the Committee expects that target range to be appropriate.
  • At the January 2012 FOMC meeting, the Committee amended the forward guidance further, extending the horizon over which it expects economic conditions to warrant exceptionally low levels of the federal funds rate to at least through late 2014.

View the full testimony

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

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