Jawboning in recent sessions has propped the greenback sharply higher across the board, with the currency hovering near 107.40 against the yen and 1.5450 versus the euro. The verbal intervention of late consisted of commentary from Fed officials and US Treasury Secretary Paulson, which strongly benefited the dollar in tempering expectations for a continued policy of benign neglect in the currency's steep declines.
With the G8 Finance Ministers meeting looming, traders will focus closely on any comments hinting at the possibility of concerted intervention by the global central banks. Although intervention remains highly improbable, US Treasury Secretary Paulson yesterday kept that option open if necessary. Paulson addressed the issue of China's currency today, saying although he believes China needs to allow its currency to strengthen more rapidly, it was not ready for a market determined currency. He also said the dollar should not be the scapegoat for record level oil prices. Meanwhile, US Under Secretary of International Affairs McCormick said no formal discussion of currencies is expected at the G8 meeting this upcoming weekend, but it will likely be mentioned at the meeting. He said that currencies have played a minor role in the recent spike in oil prices. McCormick expects it to take some time to work through housing market and capital markets issues, but sees growth to accelerate in the US before year-end.
Fed Chairman Bernanke, in a speech given late Monday evening, all but confirmed that the FOMC will leave policy unchanged barring any unexpected shocks to the financial system with the dangers to a substantial downturn in the economy having subsided somewhat and burgeoning upside risks to inflation. Bernanke said the FOMC will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as inflation. Dallas Fed President Fisher echoed a similar tone today, saying the downside risks facing the US are not as severe as initially feared but will need time to recover. Fisher said the Fed is cognizant of the negative currency feedback loop and that a weaker dollar can lead to further inflationary pressures, which weaken the dollar further. He said that recent survey signals on inflation expectations have not been positive and will not tolerate fuelling inflationary expectations.
US data released today saw a larger than expected April trade deficit at $60.9 billion, versus calls for $59.9 billion and up from $58.21 in March. The economic calendar tomorrow will see the Fed's Beige Book economic report and the May Federal Budget.
Loonie Rallies on BoC Unchanged Decision
The Canadian dollar reversed earlier losses, rallying sharply against its American namesake following the Bank of Canada's announcement to leave policy unchanged - contrary to market expectations for a 25-basis point rate cut. Further, the BoC signaled the end of additional rate cuts as a result of inflation and that current monetary policy was appropriately accommodative to achieve its 2% inflation target. The Bank deems inflation view to have shifted slightly to the upside on strong global growth and commodity prices. The BoC expects total CPI inflation rising above 3% in late 2008 compared with its previous forecast of below 2%. However, it also added that the economy is in excess supply with the risk remaining that potential growth will be weaker than assumed.