Bonds Spike, Dollar Falls on Bernanke Comments

U.S. 10-year Treasury bonds rose the most since
September today, after Fed Chairman Bernanke said that inflation pressures were
beginning to diminish. Bond prices fell over the last 3 days on
expectations of hawkish comments from Bernanke, but his thoughts on moderating
inflation pressures sent bond prices higher. Bond prices rise on economic
weakness and fall on strength, so most traders viewed Bernanke’s comments as a
negative sign for the economy. However, despite dovish inflationary
comments, Bernanke did emphasize that inflation was more of a concern that the
housing market, which would make rate hikes more likely than cuts. After
falling steadily since the beginning of December, bond prices are now the
highest they have been in nearly a month.

The dollar fell to the lowest levels in six weeks
against the euro, and also fell against the yen, after Bernanke said that
inflation risks are declining. Traders were expecting hawkish comments
from the Fed chief, and when he said that inflation pressures are cooling,
investors took that as a negative for the U.S. economy. The international
currency market has favored inflationary, positive-growth economies, which puts
the euro in the best light. The U.S. has been able to string a number of
positive reports together since December, but today’s comments from Bernanke
significantly weakened investor outlook for the dollar. The yen has also
been under heavy pressure to produce positive numbers, and is trading near
record lows against the euro.

Crude oil fell nearly 2% today on forecasts of
warm weather in the Eastern U.S. Crude oil has been on the rise since
mid-January, after a decline that saw crude prices fall over 30% from record
July highs. Crude bounced in January as cold weather finally appeared in
the U.S., and after the U.S. announced plans to double its strategic oil reserve
over the next decade. Natural gas fell about 1.5% on similar weather

Gold rose over 1% to close at 6-month highs, as
the dollar declined on the global market. Gold usually trades inversely to
the dollar and with oil, and it was dollar action that dominated today’s
trading. Traders bought gold to protect themselves against dollar
weakness. Copper fell about 0.5% after significant gains yesterday.

Grains fell across the board today. Corn
fell about 0.5%, wheat fell over 2% and soybeans rose just under 0.5%.


Fed Chief Bernanke
said that inflationary pressures should slow on cheaper energy and commodity

John Lee

Associate Editor