Singapore dollar rallies against the greenback

The US dollar lost ground to major currencies following Ben Bernanke’s testimony to US Senators.

IG Markets Singapore said:

The Singapore dollar continues to rally against the greenback breaking through a key resistance level of $1.26 last night.

The US dollar had a choppy night strengthening then losing ground to major currencies following Ben Bernanke’s testimony to Congress.

Another round of quantitative easing looks unlikely this month although the door is still open at a FOMC meeting at the end of the month.

This uncertainty saw the greenback struggle against its peers, leaving it down at $1.2585 this morning against the local currency.

The Sing dollar spent the majority of last week trading above $1.27.

DBS Group Research meanwhile noted:

Fed Chairman Ben Bernanke kept the door a little more ajar for QE3 during his semi-annual testimony to US Senators yesterday.

Overall, Bernanke believed that there were more downside risks to growth than upside risks, if any, to inflation. He hinted that slower economic growth cannot be the sole factor leading the Fed to act. The call to action will have to come from deflation, which Bernanke painted as a modest risk.

As far as the Fed’s dual mandate is concerned, QE3 will have to be triggered by a weaker jobs market. Then again, the unemployment rate is a laggard indicator.

Note also that in all periods when US inflation fell into negative territory after the Second World War, it was accompanied by a US recession.

So, if QE3 is the result of a US economy heading into recession, is it truly negative for the USD at this stage of the cycle?

BK Asset Management, on the other hand, reported (for 17 July 2012 trading):

Fed Chairman Ben Bernanke's testimony before the Senate triggered widespread volatility in currencies.

When Bernanke first spoke, the U.S. dollar soared against all the major currencies because Quantitative Easing was not mentioned as a possible tool to stimulate the economy.

Based on his prepared remarks, Bernanke is clearly frustrated with the pace of recovery but he deliberately stopped short of mentioning more QE because he knew that doing so would spark speculation of action in August, a decision that they were not prepared to make.

However as the question and answer session began, it quickly became clear that Bernanke would not be able to avoid discussing his plans for monetary policy and more specifically Quantitative Easing.

About 20 minutes into the Q&A session, Bernanke admitted that they have a range of possibilities for more easing including more QE, using the discount window and cutting the interest rate on excess reserves.

Their challenge right now is figuring out whether the "loss of momentum in the economy is enduring." However as the evidence shows, there is "frustratingly slow" progress on joblessness and a modest risk of deflation. This means that while August is out, QE3 is still an option for September.

When the dust settled, investors realized that nothing Bernanke said today removed the risk of additional stimulus and for the currency market this means there is no justification for a dollar rally.

If anything, Bernanke's concerns about deflation should tell us that the central bank remains in easing mode. FOMC member Pianalto spoke after Bernanke testimony and she confirmed that the economy needs "highly accommodative monetary policy."