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US Dollar Rebounds as Bernanke Calls for Greater Oversight

The US dollar consolidated yesterday’s losses as Fed Chairman Bernanke pushed for greater oversight in the financial markets, and picked up the biggest gains against the euro as the pair retraced to 1.574. Against the other European currencies, the US dollar rose against the British Pound as the Bank of England reduced the interest rate by 25bp to 5.00 percent, and was followed by the Swiss franc as the pair rose to 1.008. The low yielding Yen also fell against the US dollar as demands for carry trades accelerated. Accordingly, the commodity currencies picked up modest gains against the US currency as investors moved into higher yielding assets, with the New Zealand dollar taking the biggest bit out of the US dollar as it traded in the 0.7995 range.

In a speech this morning, Fed Chairman Bernanke pressed for increased oversight of the financial sector, and stressed that US regulators must work to ensure that banks will have the necessary capital to cushion themselves from inevitable market shocks. Amid the reassuring statements by Chairman Bernanke, fresh economic data persists to dampen the growth outlook as the trade deficit widened to minus $62.3B from minus $58.2B due to an unexpected rise in imports. Labor conditions have also become a growing problem as Continuing Claims rose to a four year high of 2940K as recessionary fears pushed firms to cutback on new recruitments, while Initial Jobless Claims fell the most in two years to 357K as heart sunken workers decided to leave the labor force. The ICSC Chain Store Sales index added to the bleak outlook as it plunged to minus 0.5 percent from 1.9 percent, while the Monthly Budget Statement deficit narrowed to minus $48.1B from minus $96.3B.

The stock markets retraced early morning losses as retail giant Wal-Mart increased their earnings forecast – breaking the two day losing streak. As a result, the DJIA rose 54.72 points to 12,581.98 points as IBM and Merck posted the biggest gains out of the big 30. Among the broader indices, the S&P500 climbed 6.06 points to 1,360.55 points amid 205 stocks hitting a new 52 week low.

As US regulators work to restore stability in the financial markets, investors began to feed their risk appetite and fled the safe haven of risk free bonds. As a result, the benchmark 10-Year yield jumped to 3.541 percent from 3.486, while the 2-Year yield surged to 1.839 percent from 1.774 percent.

Looking ahead, we look to finish the week on a weaker note as we expect the Import Price index to hold at 13.6 percent, and forecast the U. of Michigan Confidence index to inch lower to 69.0 from 69.5.