With the US economy deteriorating, we have been very suspicious of the recent dollar rally. The rebound has been primarily attributed to the hope for a shallow downturn and a swift recovery, but today's comments from Federal Reserve Chairman Ben Bernanke suggests otherwise. In his testimony to Congress, Bernanke warned about the downside risks to growth and despite the recent recovery in consumer spending, he expressed concern that the weakness of the labor market will pressure consumer spending going forward.
As a result, the Federal Reserve will be lowering their projections for US growth next week. Back in November, they projected growth to be between 1.8 to 2.5 percent in 2008. To put these numbers into perspective, the market expects the Eurozone to grow by 1.8 percent this year as well. The US central bank stands ready to act in a timely manner' which means that they plan on cutting interest rates further.
Before getting too excited however, Bernanke also stressed that monetary policy works with a lag. He may be telling us that the Fed plans on slowing down because the economy needs time to absorb the recent rate cuts. Easing interest rates too sharply over a short period of time could backfire, by driving up inflation pressures and making it difficult to fight inflation if the economy continues to slow.
Bernanke's comments completely overshadowed the better than expected trade balance. The deficit fell from $63.1 billion to $58.8 billion as the weaker US dollar drives exports to a record high. This confirms the improvements that we have seen in the manufacturing sector.
Tomorrow, we have a very long list of US data due for release including Import Prices, the Empire State Manufacturing Survey, the Treasury International Capital Flow report, Industrial Production and the University of Michigan Consumer Confidence report. Aside from confidence, we expect most of the numbers to be dollar bullish.
