Dollar rally after Bernanke hints at tapering later this year

Currencies Direct June 20th 2013 - 2 minute read

As investors had suspected, the Federal Open Market Committee
(FOMC) set out its plans to taper stimulus in the near future – and
the Greenback rallied for it. We avoided the risky path of merely
reducing the monthly, $85-billion-per-month injections this month
and only disregarding the costs of stimulus; the Chairman Ben
Bernanke said that the Fed can shrink its pace of acquisitions
later in 2013 and end the program completely in mid-2014…data
providing. However, there are undoubtedly targets to meet before
support is curbed, but for a market running on record levels of
leverage and over-extended in its search for yield; the eventual
exit is a severe threat to a delicate balance. Going forward, the
emphasis will be the timing of a Fed exit. Excluding a sharp slump
in growth or trend higher in the unemployment rate, the group will
likely make an effort to adjust the market’s to eventual reduction
in QE purchases. As Bernanke is likely to end his rein by the end
of January, there is a limited time frame to act (starting in 2013
is late and you don’t make a big policy move for someone else to
navigate). September is most likely the month to move.

The last thing policy officials want to do is to set off
activate another flare up in Europe’s on-going financial recovery.
Consequently, it’s no surprise that the Cyprus backpedalled on its
calls to the Troika to relax the requirements on the country’s €10
billion rescue program – following concerns it would be unable to
meet the objectives. Today, the government said they are fully
committed to the original plan and would need no overhaul. Expect
this to be an issue we come back to – but whether or not the market
grasps /cares about that now remains to be seen. We have timely
growth proxies in the June PMI figures and Eurozone Consumer
Confidence survey. The Euro-area Finance Ministers meeting will be
dissected for any policy suggestions on Cyprus, Greece, Spain,
etc.

Finally, the minutes to the Bank of England Governor Mervyn
King’s last meeting were released, and they indicated that the
central banker was once more in the minority (3-6) in his attempt
to increase stimulus. The caginess to increase support to the
economy is fascinating when we consider that the UK narrowly
avoided a triple dip recession; while the US is chasing a massive,
$85 billion-per-month program while undergoing steady but tame
growth. In an environment where the largest central banks have far
surpassed the BoE’s efforts, there is a monetary policy-led growth
disadvantage. That may be the concern that incoming-Governor Marc
Carney may bring with him next. The question, though, is whether he
can convince his fellow Monetary Policy Committee (MPC)
members. 

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Currencies Direct

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