New Federal Reserve chairman Bernanke to bring unforgettable surprises for the dollar?

The new chairman of the U.S. Federal Reserve Ben Bernanke was inaugurated on Tuesday afternoon, March 28th. About the same time, the Fed announced yet another 25 basis point (0.25 percentage point) increase to the Federal Funds Target Rate. Investors were apparently more interested in a press release issued by the Fed on Tuesday. As for the increase itself, it was fully expected. Experts believe that Ben Bernanke will be emulating Alan Greenspan’s approach to the handling of the U.S. economy for a long while before he gradually starts applying his own strategy.

The Federal Open Market Committee of the Federal Reserve raised their Federal Funds Target Rate to 4.25% at 23.15 Moscow time on Tuesday. Investors had been openly playing a waiting game before the press release was issued by the Fed. Stockbrokers mostly wanted to get confirmation that the Fed would stop raising the Federal Funds Target Rate in the near future. Any statement by the Fed boss should break the spell of uncertainty at the world stock markets.

The news about Germany’s business confidence index growth reaching a 15-year high overshadowed an anticipated quarter point hike. The Moscow Interbank Currency Exchange promptly reacted to the news by lowering the dollar exchange rate by 5.84 kopeks. In the meantime, the Central Bank was buying the U.S. currency in an attempt to slow down a sharp rise of the ruble. There is one more reason behind the upward trend in the ruble exchange rate. Commercial organizations need lots of rubles because they must pay taxes as the fiscal year draws to a close.

However, on the European markets the dollar kept sliding against the euro after the Russian stockbrokers called it a day. It was obvious that the latest increase to the Fed Funds Rate was well-anticipated in the market, and therefore now it has no impact on the strengthening of the dollar. Investors are keen to know whether the Fed will stop raising the rate after another 0.25 percentage point increase to the Federal Funds Target Rate that will be announced after FOMC adjourns in May. In this case the euro will not rise sharply yet the dollar will be bound to go down gradually.

By and large, today the euro looks stronger on the whole, according to analysts. Therefore, speculators will use any news to bear the dollar market. Moreover, the EU just opened a rising rates season, and therefore the euro rates and dollar rates will be gradually brought closer together step by step. The trend will gradually weaken the greenback. The steps of the European Central Bank may dwarf Alan Greenspan’s efforts aimed at boosting the U.S. economy. Besides, nobody expects any radical measures taken by Ben Bernanke. His policy seems be calculated beforehand and devoid of powerful tools to uphold the economy.

It is worthy of notice that during his last year in office Alan Greenspan warned repeatedly that the tools were limited and used up for the most part. Nobody expects the new Fed chairman will deviate from the policy objectives or wording of the previous statements by the FOMC. It stands to reason since the market hates jerky movements. However, Ben Bernanke’s surprise-free policy can not but become colorless and, at the worst, ineffective. These days he is supposed to cautiously monitor news about the state of the U.S. economy and show readiness to take it into account while developing his strategy. Judging by the assessments available at the moment, a clear-cut strategy is still missing.


Translated by Guerman Grachev

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Author`s name Dmitry Sudakov