Dollar weakens as market says goodbye to Ferguson

US Dollar

The US dollar traded higher against most of the majors yesterday, but the rally
occurred primarily during the European trading session before the US market
open.  Interestingly enough, even though the consumer price inflation report
came in stronger than expected, the dollar actually dropped, which suggests to
us that traders may have been looking for a really explosive number.  Headline
inflation jumped 0.7 percent compared to the market’s forecast of 0.5 percent
but the real sucker was the core CPI report.  Even though core prices grew by an
as expected 0.2 percent last month, it was revised lower by 0.1 percent for the
month of December.  

With big hopes for yesterday’s release, the market could do
noting but be disappointed with the downward revision.  After the somewhat more
neutral Federal Reserve minutes released yesterday, the fact that the end is
near has become even more glaring.  Five percent rates are still possible, but
anything beyond that is extremely unlikely.  This means that even though another
rate hike could still come after the March meeting, the tone of the FOMC
statement in next month’s meeting will probably be notched down significantly. 

One of the biggest news yesterday was the surprise resignation
of Federal Reserve Vice Chairman Roger Ferguson.  One of the most respected
Federal Reserve Governors, Ferguson was once thought to have what it takes to
succeed Greenspan.  As the only central banker in Washington during 9/11 while
Greenspan was in Europe, Ferguson has often been credited for steering the Fed
through the crisis.  However, Ferguson has often bumped heads with Bernanke as
he opposes inflation targeting, arguing that it limits the Fed’s flexibility. 
With his departure, Ben Bernanke’s board of governors now consists of all Bush
nominees.  This shock to the market will once again bring back concerns about
how well Ben Bernanke’s team will respond to any crisis that may fall upon the


As the major currency pairs continue to trade within a tight range, the Euro
ended the day virtually unchanged. According to this morning’s GDP release,
Germany failed to grow in the fourth quarter and instead underwent a period of
stagnation in the last 3 months of 2005.   However GDP is a number of the past
and Euro bulls have not been stifled given the strength of recent data. Positive
confidence and consumption data released in France and Italy also helped the
Euro fight back earlier losses.  France’s Business Confidence Indicator jumped
to 105 as consumer spending expanded by 0.9 percent in January, a reversal of
December’s 1.0 percent contraction. 

Consumer confidence in Italy came in stronger than expected at
110.0 in spite of consumer price inflation of 0.2 percent, indicating that
growth on the shoulders of spending may take form in spite of higher prices. 
The European Central Bank also revealed that the Euro-Zone current account
deficit fell to 5.3 billion euros in December, making the total deficit for 2005
29.0 billion euros.  Positive data in France and Italy combined with the current
account data may be enough to push the EURUSD out of a sideways pattern in
coming weeks.  This may be the push the Euro needs to initiate momentum toward
the upside that could continue with ECB rate hikes later in the year, which have
already been priced into the market.  

British Pound

Even though the British pound ended the day weaker against the dollar, it staged
a nice recovery from earlier weakness during the US trading session.  The much
awaited minutes from the most recent monetary policy meeting showed no change in
the balance of votes.  The committee voted 8-1 to leave interest rates unchanged
with MPC Nickell once again being the only dissenter who favored a rate cut.  If
you recall, the forecast ranged the gamut from 9-0 to 7-2, so the fact that no
one changed their minds made the release of the minutes essentially a
non-event.  The BoE was slightly more optimistic however, as they cited stronger
GDP and consumption growth.  The CBI industrial trends survey also came in
stronger than expected, rising to -18 from -28, which has helped pare back
expectations for another rate cut in the near future.  

Japanese Yen

After three days of solid gains, the Japanese Yen has actually strengthened
against the dollar.  In fact, the Yen strengthened against all of the major
currencies as the Japanese government upgraded its outlook for the economy. 
With recent economic data showing strength, the government opted to drop the
words slowly or gradually from their assessment of economic growth.  For the
most part, they agree with the Bank of Japan that the recovery should continue
but still feel that according to the fourth quarter GDP deflator, deflation is
still prevalent.  Therefore even though USD/JPY gave back some of its recent
gains today, the overall uptrend remains dominant.  Meanwhile we are expecting
the trade balance and the tertiary activity index later tonight which could
grant the Yen a bit more volatility.  

Kathy Lien

Kathy Lien is the Chief Currency
Strategist at

Forex Capital Markets
Kathy is responsible for providing research and analysis for

including technical and fundamental research reports, market commentaries and
trading strategies. A seasoned FX analyst and trader, prior to joining FXCM,
Kathy was an Associate at JPMorgan Chase where she worked in Cross Markets and
Foreign Exchange Trading.

Kathy has vast experience within the interbank
market using both technical and fundamental analysis to trade FX spot and
options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental