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Posts Tagged ‘Ben Bernanke’

Europe risk has eased – Bernanke

Washington – Federal Reserve Chairman Ben Bernanke says the threats from Europe’s debt crisis have eased in recent weeks, but US money market funds remain exposed to risky European assets.

In testimony prepared for a congressional hearing on Wednesday, Bernanke noted developments that have minimised the danger. He pointed to bailout support that European leaders provided in exchange for deep budget cuts by the Greek government and he highlighted the agreement by private creditors to reduce Greece’s debt.

But he said Europe must take further steps, including strengthening its banking system still more and making “a significant expansion of financial backstops” to guard against troubles in one country spilling over to other nations.

“Europe’s financial and economic situation remains difficult, and it is critical that the European leaders follow through on their policy commitments to ensure a lasting stabilisation,” Bernanke said in remarks prepared for the House Committee on Oversight and Government Reform.

While US financial institutions have reduced their exposure to Europe, Bernanke said roughly 35 percent of assets in US prime money market funds are European holdings.

“US financial firms and money market funds have had time to adjust their exposures and hedge their risks to some degree… but the risks of contagion remain a concern both for these institutions and their supervisors and regulators,” Bernanke said.

Bernanke said that if Europe took a severe turn for the worse, the US financial sector would have to contend not only with problems stemming from its direct exposure to European loans and investments but also with broader market movements including declines in global stock prices, increased credit costs and reduce availability of funding.

To address those broader risks, Bernanke noted, the Fed conducted a stress test of 19 of the largest US financial institutions. Those tests, results of which were released last week, found that all but four of the 19 were strong enough to sustain a major economic downturn worse than the 2007-2009 Great Recession.

Bernanke said in his testimony that those results showed that a “significant majority” of the largest US banks would have adequate capital to withstand large loan losses from an extremely adverse situation. He said the tests were designed to capture both direct and indirect exposures of US banks “to the economic and financial stresses that might arise from a severe crisis in Europe”.

Bernanke and Treasury Secretary Timothy Geithner are both scheduled to appear before the House panel on Wednesday.

In his prepared testimony, Geithner said that the Obama administration was encouraged by the steps that Europe has taken to address the debt crisis.

“We hope European leaders will build on that progress with additional actions to calm the financial tensions that have been so damaging to global economic growth,” Geithner said.

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Dollar Near One-Week Low Versus Euro Before Fed Bernanke

The dollar traded within 0.3 percent of its lowest in a week against the euro on speculation Federal Reserve Chairman Ben Bernanke will reiterate today that a slow U.S. recovery warrants near-zero interest rates.

The 17-nation euro neared a four-month high against the yen before reports this week forecast to show German services and factory output grew in March. Australia’s dollar fell for the first time in four days on concern slowing Chinese growth will dent demand for the South Pacific nation’s exports. New Zealand’s currency dropped as Asian stocks weakened, damping demand for higher-yielding assets.

“The Fed is not going to change their recent rhetoric on the economy and they’re going to still characterize the recovery as somewhat tepid,” said Andrew Salter, a strategist at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney. “The long-term trend that’s in place is U.S. dollar weakness.”

The dollar was at $1.3231 per euro as of 10:37 a.m. in Singapore from $1.3238 in New York yesterday, when it fell as low as $1.3266, the least since March 9. It fetched 83.48 yen from 83.35. The euro bought 110.46 yen from 110.34 after rising as high as 110.57 yesterday, the most since Oct. 31.

Bernanke said March 14 that a “frustratingly slow” recovery in the world’s largest economy was impeding efforts by banks to make profitable loans. Policy makers said the previous day that “elevated” unemployment and a subdued outlook for inflation warranted keeping borrowing costs “exceptionally low” at least through late 2014.

Dollar Declines

Bernanke will give the first of four lectures at George Washington University today and testify before a U.S. House committee about Europe’s debt crisis on March 21.

The dollar has declined 0.5 percent in the past week, the third-worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 0.8 percent and the yen declined 1.2 percent.

Liquidity in currency markets will be thin today due to a public holiday in Japan, UBS AG said in a research note.

Demand for the 17-nation euro may be bolstered before March 22 data from London-based Markit Economics that’s predicted to show manufacturing and services growth accelerated in Germany. Factory output climbed to 51 this month from 50.2 in February while a gauge of services rose to 53.1 from 52.8, according to the median estimate in Bloomberg News surveys of economists.

ANZ Bank’s Salter predicts the euro will climb to $1.35 by June and $1.37 by September. The currency will trade at $1.29 and $1.30, respectively, according the median forecast in a Bloomberg survey of analysts.

China Demand

The so-called Aussie retreated from near a 10-month high against the yen as BHP Billiton Ltd. (BHP), the world’s largest mining company, said steel growth in China has flattened off. China is Australia’s largest trading partner.

“There will be further risk that the Chinese economy will be slowing down” in a stronger deceleration than expected, said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “The Aussie is still a sell on rallies at the moment.”

The Australian dollar declined 0.4 percent to $1.0567 and weakened 0.2 percent to 88.23 yen. It yesterday reached 88.64, the most since May 3. The New Zealand dollar declined 0.3 percent to 82.40 U.S. cents and traded at 68.79 yen from 68.87 yesterday.

The MSCI Asia Pacific excluding Japan index of regional stocks fell 0.6 percent, set for its biggest decline in more than a week.

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Dollar Rejection Could Turn Into Heavy Selling If Risk Appetite Holds

Fundamental Forecast for the US Dollar: Bearish

  • Is the greenback a burgeoning carry currency? A jump in yields fortifies bulls’ expectations
  • Fed decision brings no change to policy, but boosts growth outlook and curbs QE3 expectations
  • US Dollar at risk of turning a correction into a deeper reversal

The dollar took an abrupt, bearish turn through the final 48 hours of this past trading week. The fact that this move turned the currency back onto its traditional ‘safe haven’ track suggests its extraordinary bull run may have come to an end. And, for the technically inclined, it is worth noting that the timing for this turn aligned nicely to a test of 10,100 for the Dow Jones FXCM Dollar index (the range high going back to January of last year) and 1.3000 for EURUSD. When fundamental drive flags, technical barriers often have greater influence over price action.

Where we go from here will likely be a combination of inherent fundamental concerns, underlying speculative interests and ever-present technical influence. Through the past few weeks, we have seen a remarkable shift in long-standing correlations. Perhaps one of the most recognizable links for the markets over the past few years has been the dollar’s position as a safe haven currency (for better or worse). We have come to expect the benchmark currency moving in the opposite direction as ‘beta’ market standard like the S&P 500 or carry trade. That said, we witnessed the equity index drive through the even 1,400 figure while the Dollar Index advanced to the aforementioned range resistance.

This unusual set of circumstances can be attributed to a number of factors: a faulty equities rally that is ready to collapse; a systemic change in the greenback’s function as a funding and liquidity currency; or perhaps it was simply the reflection of lacking conviction behind the one thing that has synced all these markets up: risk appetite trends. In reality, it was a little bit of all three. For the greenback, safe haven appeal does not necessarily translate into an ideal funding currency for carry interest. Yet, with rates anchored to zero, the capital markets awash with stimulus and the Fed vowing to keep the policy reins loose until 2014; the currency has easily fallen into the role.

That said, when we are at this extreme on the spectrum, there is a greater sensitivity to even modest shifts in fundamental changes. Just as we would expect the first rate cut (or expectations of that outcome) to drive a high yield currency like the Aussie lower, when the extremely favorable carry terms for the dollar come under duress; we see an outsized reaction from the market. With the Fed policy decision this past week, that button was pushed. Furthering the concern from the previous week that Chairman Bernanke didn’t offer an easy track for QE3 timing, the policy group gave an improved growth outlook and curbed expectations of another round of stimulus (much less a near-term injection). Indeed, the swaps showed the rate outlook moved up the pricing in of a 25bp hike from mid-2014 up to the third quarter of 2013 and 10-year Treasury yields advanced. However, is this a sustainable trend. Would the market start a rally this early on such distant expectations of what will be a tame return to higher rates? It is unlikely.

What matters once again are risk appetite trends. If capital markets (S&P 500) continue to climb on the outlook for firmer growth and stable, low rates; a low-yield dollar will likely fall back into its comfortable correlations. There will also be a ‘premium’ that was built into the dollar’s strong run on rate expectations that could also work against the currency early in the week given a ‘risk on’ market. However, we shouldn’t necessarily write off the alternative, underlying scenario: a genuine risk aversion shift. If the capital markets’ performance has found any traction on stimulus, the risk that the next move from the primary policy authority is a cut could break sentiment trends.

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