Bernanke Faced Stiff Opposition

The US Senate voted on Thursday to reconfirm Ben Bernanke as Fed chairman for another four year term. Bernanke faced the stiffest opposition of any Fed nominee since Paul Volcker in 1083. Bernanke was confirmed by a 70-30 vote in the US Senate. Although the Fed is supposed to be politically neutral and independent there were those who tried to politicize the confirmation process. Chris Krueger of Concept Capital stated, “The politically neutral and independent Fed has really been politicized this week, probably to its detriment.”  Bernanke survived a rebellion by Democrats and Republicans displeased by big banks and the lack of oversight.

Obama Pleased by Confirmation

US President Obama was pleased by the senate vote and said he is looking forward to working closely with Bernanke. President Obama said, “As the nation continues to face the consequences of the worst recession in a generation, Ben Bernanke has provided wisdom and steady leadership in the midst of the financial and economic crisis.” Many senators credited Bernanke with guiding the US economy through the worst financial crisis since the great depression. Other senators, mostly Republicans, severely criticized Bernanke. Senator Richard Shelby, the top Republican on the Senate Banking Committee stated, “Bernanke fiddled while our markets burned.”

Bill Clinton Supports Bernanke Confirmation

The strength of the opposition to Bernanke’s confirmation rattled financial markets before the senate vote. Former US President Bill Clinton, who is attending a summit of business and financial leaders in Davos Switzerland, weighed in on Bernanke’s confirmation. In a lengthy statement Clinton said; “To tell you the truth, I have been so caught up in this Haiti job that I have for the U.N. that I have not studied his [Obama's] proposals, and I can’t comment. I will say this: I think he is right to reappoint Mr. Bernanke, for two reasons. One is that I think since this crisis occurred in September of 2008, Bernanke’s decisions have been very good, they have kept the American economy going and given us a chance to heal. Secondly, he said something that is very important to say, that the crisis occurred because regulation in the past had been too lax. So I think the beginning is to confirm him and reward both his acknowledgment of the past lax regulation and his service since the financial meltdown. Now, so what we have to do, what Congress has to do, what the financial community needs to do is not to deny that we need more effective regulation. If they don’t like the specifics that the president has proposed, they ought to say what they are for, but we shouldn’t have any more shams. And we shouldn’t say that things are off-limits that shouldn’t be. I applaud the fact that the president and Congress are trying to deal with this. I can’t offer you an opinion because I’ve hardly slept since the earthquake in Haiti and I would be giving you an uninformed opinion.”

Markets React Positively

By and large financial markets have reacted positively to the Bernanke confirmation and most brokers, currency traders and investors seem pleased with the senate vote.

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New Forex Regulations Due

The forex market is the world’s largest with about $3 trillion dollars being traded daily. The forex market is open 24 hours a day five days a week. The forex market is not centralized and has no exchange of its own in a central location. Compared to other markets the forex market is relatively unregulated by all that may change as early as this week. The Commodity Futures Trading Commission is expected to publish new rules regulating forex trading. The new rules are expected to affect mostly forex brokers and dealers by adding new registration requirements.

Capital Requirements For Brokers May be Raised

It is widely expected that sales people in the retail forex market will be required to register with the Commodity Futures Trading Commission. There is speculation that forex dealer’s capital requirements could be raised. Should this happen many expect forex brokers to consolidate. One of the most attractive features of the forex market is the ability to use leverage or margin. At the present time leverage of up to 400:1 is possible and the new rules could drastically lower the amount of leverage available to investors.

Reduced Leverage a Possibility

Many in the forex industry speculate that under the new regulations the maximum amount of leverage available could be reduced as low as 50:1 or possibly 25:1. This would mean big changes in an industry where the use of high leverage makes the forex market attractive to many traders. As has been pointed out by many currency trading experts leverage is a double edged sword. While high leverage can lead to large profits it can also lead to quick and irreversible losses. Once the new rules are published by the Commodity Futures Trading Commission it will probably take six to twelve months before they go into effect and revisions are possible. Brokers, traders and investors will be following the new requirements closely.

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Dollar Gains on Euro

The US dollar will probably benefit from the ongoing Greek fiscal crisis but some experts say dollar gains will be limited by concerns about the future of the US economy. News stories about Greece’s fiscal crisis have pressured the euro in recent trading sessions. The crisis has caused tensions among EU nations and ECB President Jean Claude Trichet said that Greece will receive no special treatment. In a recent report foreign exchange strategist Michael Hart wrote, “The sharpening internal strains illustrate that the euro- zone is far from being an optimal currency union. These internal strains are independent of the external value of the euro but will in turn continue to undermine it.” Despite the Greek government’s plan to hike taxes and cut spending the country’s fiscal problems are expected to weigh on the euro well into 2010.

New US Data Due This Week

Problems in other EU nations, most notably Portugal, Ireland, Italy, and Spain have pressured the euro. Next week investors will focus on new US economic data including U.S. net capital flows, producer prices, housing starts, and initial jobless claims. Recent US data has been mixed and traders and investors remain concerned about the pace of US recovery. Tim Evans of Lind-Waldock stated, “The markets will possibly be nervous with U.S. data that’s not favorable. If those numbers come in bearish, then that would further discount the dollar. The jury is still out about the U.S. economy. People are concerned that the optimism we saw with good U.S. numbers may be waning a bit, that this recovery may be slowing.”

Aussie and Kiwi Decline

On Friday the yen and US dollar rose against most major currencies as falling stocks sent investors to the safe haven offered by both currencies. Last week’s winners, the Aussie and Kiwi dollars fell as the pace of global recovery slows paring demand for higher yielding assets.

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Modest US Recovery

The dollar extended losses against major currencies after the Fed’s beige book reported modestly improving economic conditions in the US. A US Treasury report said that the US had a budget deficit of $91.8 billion for the month of December. The Fed report said that December’s retail sales were better than in 2008 but still shore to 2007 sales figures. Some Fed districts reported some increase in economic activity and an improvement in conditions.  The beige book is formally known as the Summary of Commentary on Current Economic Conditions and is published by the Federal Reserve board eight times a year. The beige book is a collection of “anecdotal information on current economic conditions” in each Fed district.

Ongoing Greek Fiscal Problems Pressure Euro

The euro declined against the dollar and yen after comments by European Central bank President Jean Claude Trichet who said that the economic outlook for the euro zone remains uncertain and suggested that the ECB’s rates would be on hole for quite some time. Greece’s fiscal problems have also weighed on the euro. German Chancellor Angela Merkel said that Greece’s budget deficits may send the euro into a “very difficult phase.” Alan Ruskin of the Royal Bank of Scotland Group Plc stated, “The euro has this overhang from Greece, which is still making headlines. There’s definitely concern around the euro periphery in general.” Referring to Greece Trichet said, “no government, no state can expect special treatment.”

Aussie Big Winner

The dollar fell vs. the yen after Commerce Department figures reported that US retail sales unexpectedly fell 0.3% in December. New York Fed Bank President William Dudley said that Fed rates are likely to remain low for at least six month and possibly for two years dimming speculation that the Fed will raise rates anytime soon. The Aussie was the biggest winner vs. the greenback after Australia’s statistics bureau said that Australian employers added 35,200 jobs in December.

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Euro at One Month High vs. Dollar

The euro rose to a one month high against the US dollar on Wednesday in advance of the release of the Fed’s ‘Beige Book.’ Commodity linked currencies such as the Aussie dollar and Canadian dollar gained broadly as investors concluded that China’s recent monetary tightening policies would not affect Chinese economic growth. Omer Esiner of Travelex Global Business Payments in Washington said, “The reaction yesterday to China’s measures was a bit overstated, with the euro and most commodity currencies selling off. Today we are seeing a retracement of that move and the realization that the impact of the China’s bank moves won’t be so detrimental to the global growth scenario.” The euro gained 0.5% and last traded at $1.4568.

Fed Beige Book Due

Traders and investors are waiting for the release of the Fed’s beige book which is it’s its survey of economic conditions. In addition top executives of Wall Street’s largest firms are scheduled to testify before congress later in the day. Sacha Tihanyi of Scotia Capital stated, “Any significant improvement (in the Beige Book reading) would be mildly bullish for the dollar in the current trading environment.” The pound gained for the fourth straight day against the dollar. The pound was helped by statements by Bank of England policy maker Andrew Sentence who said that interest rates may have to increase this year. Disappointing US job figures have pressured the dollar in recent trading sessions. Many analysts see the recent figures pointing to lackluster recovery in the US. Andrew Wilkinson of Interactive Brokers Group stated, “The lackluster momentum for the U.S. recovery has resumed and that seems to be undermining the dollar right now.”

Yen Drops

The Japanese yen dropped as stocks rose and many now see the yen as the currency of choice for carry trades. David Deddouche of Societe Generale SA stated, “The yen is clearly now the funding choice for the carry trades. As long as we stay in the sweet spot for equities, the yen has weakening bias.”

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Worse Than Expected US Employment Figures

On Friday the US dollar had an extremely bad day after US employment figures showed that US employers cut an unexpected 85,000 jobs in December. The dismal figures pared speculation that the Fed will raise rates anytime soon. The dollar pulled back from a four month high vs. the Japanese yen and the euro posted its biggest one day gain against the greenback. Most investors and traders were optimistic about the jobs report after November figures showed US employers cut fewer jobs since the global recession began and most expected the trend to continue. Samarjit Shankar of BNY Mellon in Boston said, “It was undoubtedly a disappointing number. It’s put a dent on rate hike expectations … and is a bit of a setback for investors who were looking for a relatively stable and smooth economic recovery. the U.S. still has a weak labor market, and until that gets turned around, you are not going to have a sustainable recovery.”

Fed Unlikely to Raise Rates

The euro gained 0.7% on the day trading at $1.4416 the biggest percentage rise since November. The ICE Futures U.S. dollar index which tracks the greenback against six major currencies fell 0.6% to 77.454. Interest rate futures traders have pared expectations that the Fed will raise rates anytime soon. They are now saying there is only a 22% chance the Fed will raise rates before mid 2010. Before the dismal jobs figures they had predicted a 40% chance the Fed would raise rates. Despite the jobs figures analysts say that the US economy has shown signs of growth and predict the dollar’s weakness will be brief. Vassili Serebriakov of Wells Fargo stated, “All together this report will probably work against the more optimistic expectations on the U.S. economy. It is negative for the dollar, and we are seeing it getting weaker. But we don’t expect to see a complete reversal in the dollar gains from last month based solely on this report. We need more data points.”

Japanese Finance Minister Retreats From Call For Weaker Yen

The dollar declined 0.7% against the yen trading at 92.67 yen. Japan’s new finance minister retreated from his call for a weaker yen after a rebuke from Japan’s Prime Minister which helped the yen in currency markets.

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Dollar Loses 4.2% in 2009

The dollar rally in December 2009 helped the dollar post its first monthly since June and trimmed dollar losses to 4.2% for 2009. The dollar hit a three month high vs. the yen and gained on the euro as the Federal Reserve reported that job losses were ‘abating.’ A surge in Treasury yields made the dollar less attractive as a funding currency for carry trades. The dollar gained after the non farm payrolls report said that US employers trimmed fewer jobs in November and showed a vast improvement in employment figures. Money manager Thanos Papasavvas stated, “We are seeing the dollar recover probably into the first quarter of next year. We would expect the unemployment rate to start to stabilize.”

Central Banks Cut Dollar Reserves

There was also bad news for the dollar. Central banks in emerging market countries cut the US dollars share of their foreign reserves for the second consecutive quarter. The dollar’s share fell below 60% during a three month period ending September 2009, the lowest level in five years. Goldman Sachs economist Thomas Stolper wrote, “It is getting more and more difficult to dismiss the ongoing decline in the share of dollar reserves as temporary noise. It is now increasingly likely that emerging-market central banks have indeed decided to reduce the share of dollar reserves.” China, Russia and other developing countries are seriously questioning the greenback’s status as a global reserve currency. Massive US debt has caused concern about the stability of the dollar.

Canadian and Aussie Dollars Benefit

In September World Bank president Robert Zoellick said the dollar’s reserve status should not be taken for granted and may be challenged in the future. The Aussie and Canadian dollar were chief beneficiaries of the move away from US dollars according to Goldman Sachs experts. Goldman Sachs, working with IMF data reported that the category of “other currencies” rose from 2.2% to 3.2%.

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