In Reversal, US Dollar Gains On Growth Expectations
December 06 2010 - 5:31PM
Dow Jones News
What a difference a weekend makes.
Investors who initially interpreted weak payrolls as something
negative for the U.S. dollar are now pricing in expectations that
the Federal Reserve's controversial bond-buying program will
buttress economic growth and help support the dollar in the near
term.
Last week, traders dumped the greenback en masse following news
that employment growth in November fell far short of expectations.
But the market reassessed its opinion on Monday, sending the dollar
about 1% higher against the euro, after Federal Reserve Chairman
Ben Bernanke told an interviewer on CBS' "60 Minutes" program on
Sunday that another recession appeared unlikely.
The Fed chief added that the central bank was prepared to
increase its $600 billion monetary stimulus plan, if needed.
Bernanke's assertive public relations campaign gave traders
added incentive on Monday to give back nearly half the previous
U.S. session's gains, amid lingering concerns over Europe's
sovereign debt crisis. Analysts said that, at least momentarily,
the market was cautiously optimistic the massive infusions of
liquidity by the Fed would help support an economic expansion.
"It's all about the market's expectations of future monetary
policy...and right now that is going in favor of the U.S.," said
Frank Warnock, a professor at the University of Virginia's Darden
Business School.
Warnock pointed to data illustrating a tight correlation between
the euro/U.S. dollar exchange rate and the yield differential
between Germany's two-year bond and comparable U.S. debt. According
to Warnock, that difference is a reasonable indicator of the
market's expectations of economic growth, which right now favor the
United States.
In short, the Fed's monetary easing efforts "absolutely can be
dollar-positive if the markets decide that [it is] going to be part
of the package that brings about a revival in economic growth," he
added.
Traders appeared to agree, as the greenback changed hands above
$1.33 against the euro in late U.S. trading, a cent higher than the
previous session.
Markets were also preparing for the risk of disappointment from
a meeting of euro-zone finance ministers in Brussels, which
undermined the euro. Leaders were set to address the need for a
financial stabilization fund for the 16-nation currency bloc's
distressed economies. Some traders are speculating the package will
fall short of what is needed to cushion the euro zone from the
reverberations of its debt crisis.
Some economists have suggested the initial pessimism over the
Fed's monetary easing might be overdone, considering the global
economy is still in the throes of a lurching recovery.
More liquidity "will just sit on the banks' balance sheet as an
extra cushion," said Carl Weinberg, chief economist at High
Frequency Economics, who dismissed the idea of an inflationary
surge, or the creation of a new asset bubble. "The Fed is blamed
for everything nowadays, but I don't think it's well-deserved."
Indeed, at least a few analysts said on Monday that the bleak
jobs data might be an anomaly in light of other figures that paint
a more constructive view of the economy.
"While the jobs report is certainly a stark reminder of just how
painfully slow the recovery is likely to be, it is beginning to be
seen as somewhat of an outlier, which could be revised upward next
month. Upside surprises to recent retail sales, manufacturing,
consumer confidence and the ADP employment report suggest that
overall economic conditions may be slightly better than Friday's
jobs data may suggest," said Omer Esiner, chief market analyst at
Commonwealth Foreign Exchange, in a research note to clients.
-By Javier E. David, Dow Jones Newswires; 212-416-4564;
javier.david@dowjones.com