Daily strategy 26-01-10 - Hesitant dollar advance

on January 26 2010 6:56 AM

There will be expectations of slightly firmer Fed rhetoric at Wednesday's interest rate-setting meeting which will provide some dollar support. It will still be difficult to secure strong dollar support on yield grounds, especially with speculation that Bernanke will pledge low rates to gain Senate backing. Underlying sentiment towards the Euro-zone is liable to remain very fragile which will hamper the Euro as structural fears persist. The net risks still look to be for a slightly firmer US currency and a move to the 1.40 zone over the next 24 hours.

Developments surrounding Bernanke's position will continue to be watched closely in the short term. Senate leaders are aiming to hold a vote this week on whether to confirm Bernanke for a second four-year term. There will also be some speculation that there will be an informal pact for Bernanke to pledge low interest rates in return for supporting his nomination.

This speculation will be particularly important given that the latest FOMC meeting will announce its interest rate decision on Wednesday. The uncertainty surrounding Bernanke will tend to lessen expectations of firmer rhetoric by the Fed. Nevertheless, the net risks still point to a slightly more optimistic Fed tone which should help lessen any selling pressure on the dollar.

The existing home sales data was weaker than expected with a drop to an annualised rate of 5.45mn for December from 6.45mn the previous month, but prices rose and inventories declined which should provide some support early in 2010. The dollar can still gain some defensive support on generally weaker risk appetite.

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