Currency Wars: The Dollar Strikes Back?

Something monumental has happened: the US dollar has done well, and it didn’t require a divine intervention.

With most of the trading week gone, the USD has walked all over the Euro to the tune of over 2%. And perhaps the most interesting detail was that this rally did not start on the heels of some unexpected economic recovery; it started with Bernanke finally utilizing his clout. When he became Chairman, he stated that inflation would be his foremost concern. Two years later, after letting Wall Street bully him into a series of rate cuts, Big Ben has finally dug his heels into the sand.

Among other events, this week has witnessed dramatic rise in US unemployment, the ECB announcing that a rate hike is coming soon, and oil prices hovering around all-time highs. So, what does Bernanke do? He goes out and says that inflation is his top priority, the US economy will avoid recession, and the USD’s strength is also a focus for the Fed’s future actions. Are things actually turning around? Will the Fed really raise rates soon? I don’t think that anyone is certain… but that’s largely irrelevant. What is relevant is that Bernanke put on a brave face and exuded optimism, and the markets responded in a big way.

Elsewhere, the big players in the Euro zone are still trying to figure out what the best move is. First Trichet said that hikes are coming, and then several other ECB figures have clarified that announcement. Now the French Finance Minister has publicly pleaded with the ever-hawkish Trichet to rethink his coming actions. The uncertainty and lack of unity over the future (unlike the Fed, which has displayed a unified stance) has likely been a contributing factor to the USD sticking it to the EUR. As we move towards the close of the week, it will be interesting to see if Bernanke’s words (along with any forthcoming data — see below) are enough to fuel the USD’s surge.

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