Dollar Edges Higher

Dollar Edges Higher on Jawboning
by Korman Tam

The dollar edged up higher on Tuesday, rising to 1.5637 versus the euro and 107.51 against the yen as comments from Fed officials¡¯ added support for the greenback. Economic data released today included pending home sales and wholesale inventories. May pending home sales plunged sharply, down by 4.7% and reversing the 6.3% increase a month earlier. Meanwhile, wholesale inventories was marginally better than forecast at 0.8%, down from 1.3% from April.

Traders focused on Fed speak amid a quiet session for US economic reports. Fed Chairman Ben Bernanke propped up the dollar in the morning pledging to ¡°extend the duration of facilities for primary dealers beyond year-end, should current unusual and exigent circumstances continue to prevail in dealer funding markets¡±. Bernanke tempered heightened fears stemming from concerns over the solvency of Fannie Mae and Freddie Mac.

Hawkish comments from Richmond Fed President Jeffrey Lacker also benefited the dollar, saying the Fed must be prepared to raise rates even if unemployment remains high and growth is still weak. He also added that the Fed must act forcefully if inflation expectations erode and be vigilant of risks associated with persistent high inflation. Lacker said that downside risks to growth have diminished significantly since the start of the year while expectations for future inflation have become untethered. Interestingly, Lacker voted to leave policy unchanged at the Fed¡¯s June meeting with Plosser being the sole dissenter, voting for a rate hike in stead. Nonetheless, we expect the FOMC to leave rates unchanged until Q4 given the current economic outlook.