Fed dove doesn’t turn hawkish – EUR/USD above resistance, AUD/USD above 0.98

The dollar extended its slide across the board as FOMC member Charles Evans made relatively carefully statements, and didn’t make any hints about QE tapering.

Has the dollar rally ended or is it just a healthy correction before the next surge?

What Evans said

Chicago Federal Reserve President Charles Evans did provide some optimism. He said that the economy is improving quite a lot, although headwinds remain. The recent mixed economic data doesn’t make him “overly concerned”.

The job market is good news. He sees the unemployment rate falling and also government layoffs falling. Consumer spending is quite good despite tax hikes.

2013 is a year of turnaround, for Evans, that talked about growth standing at 2.5% and rising above 3% in 2014.

What Evans didn’t say

With so many positive statements about the economy, why didn’t the dollar rise? Well, Evans also said that the current Fed policy is appropriate. And there’s also something that he didn’t say: he didn’t mention any unwinding,  tapering or scaling down of QE.

Evans did not follow the footsteps of his colleague John Williams, also a dove, who mentioned some unwinding of QE as soon as this summer.

Currencies

His speech came on a very light day of economic data and after the dollar rallied strongly on Friday.

• USD/JPY: The correction against the yen already began earlier, with Japan’s economy minister talking down the yen.
• EUR/USD continued recovering after dipping below 1.28, and it is now trading above the resistance line of 1.2880 that capped it earlier. It’s important to remember that the flow of FOMC speakers will be countered by ECB president Mario Draghi later in the week. There are plenty of other important indicators. See the EUR/USD outlook for more.
• AUD/USD, which collapsed across the board, finally found some comfort, and managed to collect itself from the ground of 0.97 and marched steadily above 0.98. This is a significant comeback, but just be a healthy correction before the next fall.
• GBP/USD, that struggled with 1.52, is now trading around 1.5260. Cable certainly has reasons to rise.
• USD/CAD managed to calm down (also thanks to Canada’s Victoria Day), and it fell under 1.0250.

Where next for the US dollar? Is it a correction before the next surge or a turn in direction?

A lot depends on Ben Bernanke, that will testify on Wednesday. In general, members of the US central bank are set to dominate FX this week. And where is Bernanke headed? He might be ready for a change – a change that will boost the dollar.

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Forex - Dollar falls on yen warning, awaits Bernanke comments

The dollar fell against most of its peers in U.S. trading on Monday after Japan's Economy Minister warned further depreciation of the Japanese currency could hurt the economy.

Fading hopes that Federal Reserve Chairman Ben Bernanke will hint at when easing tools will scale back also weakened the greenback. 

Stimulus measures, such as the Fed's monthly USD85 billion bond-buying program, weaken the greenback by flooding the economy full of liquidity to keep interest rates low and encourage investing and hiring.

In U.S. trading on Monday, EUR/USD was up 0.43% at 1.2890.

The dollar fell on Monday after Japanese Economy Minister Akira Amari said that further depreciation of the yen could harm Japan's economy.

The Bank of Japan has enacted massive monetary easing measures to steer the country away from deflationary decline and more towards growth, with the yen plunging to lows against the dollar not seen since 2008.

Amari's comments sparked demand for the yen that came at the dollar's expense and brought up the euro and other currencies with it in a quiet session with little in the way of economic indicators or other steering currents.

The dollar, meanwhile, saw some support in wake of Friday's consumer sentiment data.
The Thomson Reuters/University of Michigan's preliminary consumer sentiment index rose to 83.7 in May from 76.4 in April, blowing past expectations for a rise to 78.0. 

The numbers came after Federal Reserve officials suggested last week that the U.S. central bank may begin to unwind stimulus programs this summer and possibly end such policies by year end.

Fed Chairman Ben Bernanke is due to appear in Congress on Wednesday, though Monday trading, hopes began to taper off that the country's top central banker will hint at a need to wind down stimulus programs.

The greenback, meanwhile, was down against the pound, with GBP/USDtrading up 0.64% at 1.5265.

The dollar was down against the yen, with USD/JPY down 0.82% at 102.35, and down against the Swiss franc, with USD/CHF trading down 0.62% at 0.9664.

The dollar was down against its cousins in Canada, Australia and New Zealand, with USD/CAD down 0.43% at 1.0232, AUD/USD up 0.83% at 0.9817 and NZD/USD trading up 1.28% at 0.8172.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.53% at 83.89. 

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