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Tuesday December 13, 2005 - 22:11:37 GMT

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Forex: Greenspan Leaves the Door Open for Bernanke

DailyFX Fundamentals 12-13-05

By Kathy Lien, Chief Strategist of

• Greenspan Leaves the Door Open for Bernanke
• Pound Slides on Softer Inflation Report
• Yen Traders Looking Ahead to Stronger Tankan

US Dollar

Catching the market by surprise, the Fed released its decision 2 minutes early. The dollar sold off against the Euro as the statement contained a whiff of dovishness. In the new and much shorter statement, the Fed dropped the sentence, “the Committee believes that policy accommodation can be removed at a pace that is likely to be measured” and replaced it with “The Committee judges that some further measured policy firming is likely to be needed.” According to the Fed, core inflation still remains relatively low, but they will continue to watch economic data and the trend in energy prices to make sure inflation does not tick higher once again. We think the key really is the words “likely to be needed,” because this means is that the Fed is paving the way for a January rate hike, but leaving changes in March a bit more uncertain. This makes perfect sense since the January meeting will be the last that Greenspan will Chair. For the one in March, it will be Bernanke’s call and Greenspan wants to make sure that he doesn’t lock Bernanke into any situation where the market has pre-determined expectations. The new wording gives Bernanke ample flexibility to keep raising rates or leave them unchanged. Ever so diplomatic, Greenspan is clearly paving the way for a smooth and seamless transition and allowing Bernanke to adapt to the changing conditions of the economy. Given Bernanke’s past dovish statements regarding deflation, the Market may anticipate an easier monetary policy which could turn the market’s psychology against the dollar. Especially since the dollar’s bullishness has been primarily brought on by the Fed’s relentless rate hikes over the past 18 months. Meanwhile, retail sales came out softer than expected for the month of November due to a 5.9 percent drop in gasoline receipts. The Fed has noted that they are watching the trend of economic data very closely and their next move with interest rates will be based upon the trend of future data. If the economy’s growth continues to slow, they may be tempted to end their tightening cycle sooner rather than later.


Despite the less hawkish FOMC statement and more encouraging Eurozone data, the Euro gave back some of yesterday’s explosive gains. The much awaited German ZEW survey of analyst expectations increased to a whopping 61.6, far above the market’s estimate of 41.0 and even further above the previous reading of 38.7. The assessment of economic performance in Europe also increased to 51.2, showing that confidence in the economic recovery of the region as a whole has increased significantly over the past month. Also, political uncertainty has somewhat subsided thanks to a conclusion reached by the coalition government. We have been seeing expectations for business activity to increase but domestic demand has still been dragging its feet. The weaker Euro has thus far seem to only benefit the export market, but that benefit has yet to filter into the pocketbooks of consumers. Meanwhile, consumer prices fell slightly more than expected in France for the month of November. The difference was subtle but slowing inflation is a trend that we are beginning to see across the globe. Even though energy prices are back above $60, the effect on overall prices has been muted.

British Pound

Like the Euro, the British pound retraced yesterday’s gains as consumer price growth failed to mirror that of the surprisingly strong producer price growth that was reported yesterday. In fact, headline CPI was unchanged on a monthly basis after rising only 0.1 percent in October. The annualized pace of growth also slowed from 2.3 percent to 2.1 percent. The retail price index, which is the benchmark used for wage negotiations, ticked higher by 0.2 percent but the annualized pace of growth also slowed from 2.5 percent to 2.4 percent. Overall the more dovish inflation numbers should keep the Bank of England thinking about when to lower interest rates again. Slower growth and softer inflation pressures should provide the perfect backdrop for continued dovishness.

Japanese Yen

The dollar retraced some of its losses against the Japanese Yen as the People’s Bank of China adviser Yu clarified his recent comments by saying that there will be no “drastic” diversification of China’s FX reserves and that any diversification would be done gradually. Yesterday, he had said that China would be looking to reduce the dollar component of its reserve basket, causing the dollar to sell-off significantly against the majors. These wishy washy comments and flip flopping is characteristic of Yu and not necessarily an accurate reflection of the central bank’s policy. Meanwhile there are still rumors circulating around that China may be prepared to revalue their currency once again on January 1st. Always preferring to catch the market by surprise, it is difficult to tell whether these rumors are justified. Over in Japan, industrial production was confirmed at 0.6 percent, suggesting that we could see a nice rebound in tonight’s fourth quarter Tankan report.


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