US Dollar Under Stress as Bernanke Stands Ready to Cut Rates

The US dollar fell to fresh record-lows against the euro, as a speech by Fed Chairman Ben Bernanke confirmed that the central bank stands ready to cut interest rates further in order to support domestic economic growth. Indeed, the central banker said that growth risk continue to trump those of rising inflation, and as such the FOMC may vote to take rates lower despite strong price pressures. The euro subsequently rallied strongly against its US counterpart, while the Swiss Franc was actually the day’s largest gainer against the downtrodden dollar. The Australian dollar, New Zealand dollar, and Canadian dollar likewise gained sharply against their US namesake - further fueled by similar gains in global commodity prices. Yet we did see the New Zealand dollar fail to hold its fresh 22-year highs against the greenback; strongly disappointing New Zealand Business Confidence index results weighed on outlook for the high-flying currency. The British pound was the only other major currency to lose against the US dollar, as stagnant Gross Domestic Product numbers limited upside potential for the sterling.

Freshly released data hampered growth prospects for the US as Durable Goods orders plummeted, with the housing sector yet to show any sign of recovery. Durable Goods orders fell more than expected as rising costs curbed firms from spending and plunged to minus 5.3 percent from 4.4 percent, while Orders excluding Transportation fell to minus 1.6 percent from 2.0 percent. For the housing sector, the New Home sales data diminished the economic outlook for the US as it fell to minus 2.8 percent, holding at 588K units, with the MBA Mortgage Application release adding to the mounting pressures as it dropped to minus 19.2 percent.

Increased volatility took hold of the securities market as prices swayed throughout the trading session, but ended the on a brighter note as an intraday reversal pushed prices higher. The DJIA added 9.36 points to hold at 12,694.28 points, with IBM shares picking up the most gains while 3M and McDonald’s shares took the biggest dive. Amongst the broader indices, the S&P500 lost 1.27 points to stay at 1,380.02 points as Vanceinfo Technologies and Federal Signal Corp led the winners with Carter’s Inc and URS Corp topping the decliners.

US Treasury prices were driven up as a result of the increased volatility in the securities market, and sent risk adverse investors to seek the safe haven of risk free bonds. The flight to quality sunk the benchmark 10-year Treasury yield to 3.84 percent, while the 2-year Note yield likewise fell to an anemic 1.99 percent.

Looking ahead, volatility will likely continue across domestic financial markets; second revisions to Q4, 2007 GDP results will be released at 9:30 Eastern Time. A simultaneous US Initial Jobless Claims data release likewise holds potential to drive sharp moves in the domestic currency.

DailyFX

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