The fortunes of the US dollar have taken a severe knock over the past 24 hours. In the first press conference the Fed has given following an interest rate announcement, Bernanke took on a decidedly dovish tone towards the outlook for the US economy. In addition to downgrading the growth forecast for 2011, Bernanke reiterated that any potential spike in inflation will likely prove temporary, leading investors to pare back any forecasts for an interest rate rise this side of 2012.
Also weighing on the dollar, Bernanke found his growth downgrade vindicated after data revealed a disappointing GDP figure. On an annualised basis the US economy grew by 1.8% in the first quarter of the year, lower than the consensus forecast of 1.9%, and revealing a marked slowdown from the 3.2% seen in the final three months of 2010.
In response, the market has undertaken a fresh wave of dollar selling over the past couple of sessions, leading the Dollar Index to fall to its lowest level since 2008. The Australian currency hit a fresh post-float high, and both the euro and sterling reached multi-month highs. Looking ahead there appears to be little on the horizon to offer the greenback much support. Even the increasingly rare bouts of risk aversion appear to be favouring the Swiss franc over the dollar.
The problem comes down to loose monetary policy, plain and simple. The Fed is behind the interest rate curve – and by some way. Even though Bernanke’s statement did indicate that QEII will end in June (as widely expected), the market has little reason to stay invested in the currency. Risk appetite is high (regardless of the time bomb that is the eurozone), global growth prospects are improving, and the insatiable desire among Eastern sovereigns to diversify away from the world’s reserve currency remains firmly in place.
It looks now like the euro will go on in the proceeding weeks to hit $1.50, and close on its coat tails I wouldn’t say that $1.70 for the pound is out of the realms of possibility. Barring any serious left of field shocks (a Greece debt restructuring is still unlikely in the medium term despite some well constructed arguments suggesting that they should), the greenback’s downtrend will not let up.
With the economic stuff out the way – I wish you all a fantastic long weekend. Here’s hoping the Royal Wedding lives up to unprecedented media hype....
Senior Analyst – Caxton FX
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