Here’s what’s next for the Dollar

• February 17, 2006
• Kathy Lien

US Dollar – The
Bernanke effect wore off in the morning hours as the new chairman ended up
rounds of questions by politicians on the current state and future of the
economy.  Once again nothing new was released other than the incumbent’s efforts
to continue the previous chairman’s policy.  However, noted was his evasiveness
to direct inquiries on questions about the future course of interest rates. 
Noting that the Federal Reserve adheres to no “mechanical rule”, Bernanke added
that monetary policy makers will be closely reviewing “all the data, trying to
make out the best assessment of the economy.” 

The chairman also called on China to further allow the yuan to
trade freely, joining forces with Treasury Secretary John Snow.  On China, when
questioned by New York Democrat Charles Schumer, Bernanke replied saying “China
ought to move toward a more flexible exchange rate.”  Separately, traders
attended to economic data, which ran a full schedule for the U.S. single
currency.  Included on the day’s docket were initial jobless claims, housing
starts and the awaited Philadelphia Fed Index. 

Against jobless claims that rose less than expected, housing
units soared to move closer to a 33-year high.  Soaring to 2.276 million units,
the released figure decimated the consensus 2 million forecast and bolsters
further growth in the housing sector.  However, taking the cake was the
Philadelphia Fed’s gauge of manufacturing activity.  Accelerating to a 15.4
read, the report surpassed expectations of a 9.1 median forecast.  Now with
manufacturing back on the up and up, further dollar strength looks to be
fortifying till the next Fed meeting in the month of March.

Euro – Nothing but an up tick in new car registrations was
released for the Euro eco fan.  For the month of January, new car registrations
rose 6.1 percent on an annualized comparison as demand was mostly boosted by the
original fifteen EU members. Notably, European carmaker models were preferred to
foreign brands as consumers increased purchase quantity, casting aside brands
such as Nissan and Honda.  Otherwise, price action remained staid following
Bernanke’s testimony this morning and looks to do so till tomorrow’s spate of
French economic data and Euro zone industrial production. 

Traders wary of the poor French figures released just a short
bit ago are expecting the current account and wage growth to reflect lower
output and export activity along with signs of a relatively loose labor market. 
Further leading to Euro near term downside, industrial production is expected to
decline as well compared to previously released figures.  A compendium of
overall production for the member states, the report is expected to be merely a
reflection of the downside data in France and Germany, two of the region’s
larger economies.  As a result, further rate hikes at the next meeting scheduled
for March 2nd remain questionable even as inflation remains looming over the
economy.  With previously lofty energy prices being taken aback slightly in
recent months, price increases look to very well fall in line with previously
tepid inflationary pressures in the United Kingdom, nullifying the need for
further rate hikes.

British Pound – Sterling was subject to similar price action that has
been witnessed over the past couple of sessions as better than expected housing
data offset dour retail sales.  Although some position paring was additionally
seen, the clashing reports kept the underlying spot in the relatively 50-pip
range that has been experienced over the past three sessions.  According to the
Royal Institution of Chartered Surveyors, housing price balances were 9 percent
in the positive, rising against the 8 print seen in the previous month.  This is
now the third monthly rise since the figure bottomed out in the month of October
and coincides with the seventh increase in housing prices according the
Nationwide Building Society, the third largest mortgage lender.  As a result,
formidable evidence now arises of stabilization in the housing market that may
spur growth and expansion in the region from 13-year lows. 

However, lingering weakness in retail sales looks to crimp the
positive contributoins of the housing sector.  Retail sales in the United
Kingdom plunged 1.3 percent on the month in January as consumers remained
hesitant of economic conditions.  This now only bolsters an annualized rise of
1.3 percent and strengthens the possibility that further rate cuts maybe
considered by the Bank of England.  Subsequently, the pessimistic retail figures
contradicts what the optimistic quarterly inflation report stated yesterday and
looks to lend to further pound bearishness in the near term.

Japanese Yen – Japanese yen weakness was felt on the day as
further paring and positive U.S. economy data pushed the currency pair higher. 
With no economic data to counter the dollar assault, yen bulls are concentrating
their expectations on tonight’s gross domestic product report.  Expected to rise
by five times the pace seen in the previous report, overall growth in the
world’s second largest economy looks to be bolstered by higher wage earnings and
climbing consumer sentiment as conditions improve.  Wage growth was seen above
at 1.6 percent while overall unemployment was suppressed to a 4.5 percent rate. 

The increased optimism has also lent to increases in capital
investment as manufacturers prepare for mounting domestic and foreign demand. 
As a result, the previously whispered recovery in the economy looks to be
confirmed, lending to a strengthened bias for the yen underlying.  However, near
term weakness still remains as interest rates remain a predominant theme,
lending to dollar favoritism.  To this end, the morning’s comments by policy
board member Kiyohiko Nishimura gave the dollar a temporary leg up.  Nishimura
stated to businessmen in the western city of Takamatsu that the central bank
will maintain low interest rates in the spirit of bolstering economic growth as
output picks up and in light of an incremental up tick in inflationary
pressures.   

Kathy Lien

Kathy Lien is the Chief Currency
Strategist at
Forex Capital Markets.
Kathy is responsible for providing research and analysis for

DailyFX,
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
analysis.