Bernanke Report Leaves Dollar Little Changed

The U.S. dollar changed little after today’s testimony by Federal Reserve Chairman Ben S. Bernanke. In his report to the House Financial Services Committee, Bernanke stated the economy will continue to grow at a modest pace picking up slack next year. The Fed Chairman expects the economy to grow 2.25 to 2.5 percent in the last quarter of 2007. In February, the Fed had expected growth to be at 2.5 to 3 percent this year. Despite acceptable growth, Bernanke expects dampening effects of the housing market slowdown, and remains worried about inflation.

The dollar dropped to 121.93 yen this morning from 122.34 yesterday and EUR/USD fell to 1.3797 from yesterday’s close of 1.3781. Michael Woolfolk at the Bank of New York states: “Any worries about weakening growth conspire to push down the dollar.”

But real question is where interest rates will go. The current benchmark for the main U.S. interest rate is 5.25 percent. Core consumer prices have shown a decrease in inflation to 1.9 percent, a significant drop from 2.4 percent in February. However, gross domestic product rose .7 percent in three months, which has been the worst rate of increase in 4 years. Overall, slow growth and little inflation have investors speculating that interest rates will remain unchanged. The Federal Open Market Committee will have its next meeting on August 7^th to determine where the main interest rate will be.

Looking specifically at the U.S. housing slump, a government report today showed builder confidence to have fallen to its lowest level in 10 years. Builder confidence is measured by the amount of new building permit activity. This is a better measure of builder confidence than housing starts, which are strongly correlated to changes in weather. The report reveals 1.41 million new permits were made in June, down from the 1.52 million for May. Further, the National Association of Home Builders stated that the home builder sentiment index fell this month to its lowest level since 1991.

The already weak U.S. dollar may see a bleak future. It is unlikely that the Fed will raise interest rates. But it is likely that the housing slump will further hamper the economy. So far the housing slump has not spilled over into other sectors, yet the continuing negative reports have not stopped either.