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Euro and Pound Edge Up as Dollar Gaps Down on Summers' Fed Candidacy

Euro and Pound Edge Up as Dollar Gaps Down on Summers' Fed Candidacy

Christopher Vecchio, CFA, Senior Strategist

Talking Points

- Larry Summers, the hawkish Fed candidate, is out of the running.

- Janet Yellen, Vice Chairman of the Fed and the dovish candidate, appears to be the new favorite.

- High yielding FX take advantage of US Dollar weakness.

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.56% (-1.34%prior 5-days)


The Dow Jones FXCM Dollar Index opened the week lower to its lowest prices since June 19, the day that the Federal Reserve officially pivoted its monetary policy towards potentially reducing QE3 later in the year. However, the US Dollar’s weakness has not been stoked by speculation surrounding this week’s FOMC meeting.

Instead, investors have turned their eye further down the Fed’s calendar to January, when current Chairman Ben Bernanke’s term is set to expire. While he has not officially announced his retirement, it is widely expected that he will leave his post in four months.

Over the past few weeks, market participants have seemingly narrowed the possible Bernanke replacements down to two candidates: Janet Yellen and Larry Summers. The former is the current Vice Chairman of the Board of Governors of the Federal Reserve; the latter served as the head of the US National Economic Council from January 2009 to November 2010.

While both candidates are highly respected within economics, there has been a growing belief that if Larry Summers, reportedly President Obama’s preferred choice, were to take over the Fed, monetary policy would tighten given Mr. Summers’ belief that fiscal stimulus (government spending) is more effective than the Fed’s recent non-standard monetary stimulus (QE).

Furthermore, market participants consider Ms. Yellen to be more dovish than Chairman Bernanke; and so the aggregate impact of Mr. Summers announcing that he would withdraw his name from consideration has the markets pricing out a hawkish chairman and pricing in a dovish chairwoman in the very near-term.

The news is unlikely to impact the US Dollar for long this week (it will matter more in the future). Instead, there are a plethora of items to watch for as we wait for the Fed’s policy meeting on Wednesday.

EURUSD 5-minute Chart: September 16, 2013 Intraday

Euro_and_Pound_Edge_Up_as_Dollar_Gaps_Down_on_Summers_Fed_Candidacy_body_Picture_1.png, Euro and Pound Edge Up as Dollar Gaps Down on Summers' Fed Candidacy

Taking a look at European credit, lower yields in the core and mixed yields in the periphery have likely weighed on the Euro on Monday. The Italian 2-year note yield has decreased to 2.027% (-2.6-bps) while the Spanish 2-year note yield has increased to 1.717% (+0.5-bps). Similarly, the Italian 10-year note yield has decreased to 4.526% (-4.8-bps) while the Spanish 10-year note yield has decreased to 4.455% (-3.0-bps); lower yields imply higher prices.

Read more: Will Positive Inflation Readings Lift the Euro on Monday?


Euro_and_Pound_Edge_Up_as_Dollar_Gaps_Down_on_Summers_Fed_Candidacy_body_x0000_i1028.png, Euro and Pound Edge Up as Dollar Gaps Down on Summers' Fed Candidacy

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--- Written by Christopher Vecchio, Currency Analyst

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