The greenback rose to a 2-week high against the euro on Tuesday after Fed Chairman Bernanke warned that the banking system was not yet stabilised and that more measures were needed to lift the economy from a recession. He also said in his testimony to the Senate Banking Committee that labour market conditions in the U.S. may have worsened in recent weeks, and defended the Government's decision to bail out insurance giant AIG. U.S. Treasury Secretary Timothy Geithner said in a separate testimony that the effort to stabilise the financial system might cost more.
In addition to Bernanke's comments, weaker-than-expected U.S. pending home sales data (sales fell by 7.7% compared to the consensus forecast of 3.3%), also gave a boost to the dollar in New York session as investors were concerned that U.S. housing market was still suffering, however, the greenback pared some of its gains on profit taking in late trading. U.S. equity markets were higher initially before falling to end the day in negative territory (Dow closed down 37 points).
The euro hit an intra-day low of 1.2521 against the dollar before recovering to 1.2560 while the British pound weakened to 1.3985 versus the greenback before bouncing to 1.4055 (gbp/usd touched a 5-week low at 1.3958 on Monday). The Japanese yen also fell on Tuesday to 98.60 against the dollar.
In other news, the Australian dollar rallied from 0.6286 to 0.6465 after the Reserve Bank of Australia unexpectedly kept rates on hold at 3.25%, with most economists calling for a 25 basis point cut. Canada's central bank reduced interest rates to 0.50% in line with the market's expectations and the Loonie weakened slightly to 1.2930 against the U.S. dollar.
Wednesday will see the release of Australian GDP data at 00:30GMT and services PMI for Germany, eurozone and the U.K. Some focus will be on the U.S. ADP employment data due out at 13:15GMT with an expectation of a loss of 610,000 jobs in February (this figure may provide a clue as to how Friday's non-farm payrolls data will turn out). ISM (non-manufacturing) index and the Fed Beige book will be released at 15:00GMT and 17:00GMT respectively.