Dollar Rebounds with Fed-chief Talk in View

After trending lower for most of the week, the U.S. dollar staged a modest rebound Friday as the market digested a media report that Lawrence Summers will be nominated as new Federal Reserve chairman as soon as next week.

Midday in Europe, the ICE dollar index DXY -0.09%  — which compares the greenback to six rival currencies — sat at 81.604, up from 81.513 late Thursday in North America.

The WSJ Dollar Index XX:BUXX -0.10% , an alternate measure of dollar strength, rose to 73.91 from late Thursday’s 73.80.

The dollar benchmarks reached their intraday highs earlier on Friday after a report by Japanese newspaper Nikkei, citing unnamed sources, said President Barack Obama plans to name former U.S. Treasury Secretary Lawrence Summers as the next chairman of the U.S. Federal Reserve Board of Governors, possibly as soon as next week.

The report was initially dollar supportive, but the greenback pared back during early European hours as investors grew skeptical of the report.

“Summer’s is seen as more skeptical of quantitative easing compared to Janet Yellen, the other front-runner. This more relates to the impact of quantitative easing on asset prices, in other words the potential for it to cause problems elsewhere in the financial system. So on face value, Summers is seen as a more dollar-positive Fed Chair,” said Simon Smith, head of research at FxPro in London.

The outlook for U.S. monetary policy has been a key focus for the market ever since Fed officials began hinting earlier this year that they were preparing to begin unwinding their stimulus measures.

Fed policy makers are due to hand down their latest policy decision on Wednesday, and many analysts expect they will cut their $85-billion-a-month rate of bond purchases, probably by $10 billion or $15 billion.

However, DailyFX chief currency strategist John Kicklighter cited “serious debate over how far the financial markets have gone to price in the likelihood” of a reduction in the central bank’s bond buys.

While the gold and Treasury markets appear to have prepared for a tapering of Fed stimulus next week, the stock market seems not to have priced in such a move.

“The probability of a wind-down is certainly not lost on this market, and it is extraordinarily exposed,” he wrote early Friday. “Such risk presents a considerable opportunity for the dollar. Waiting until the dam breaks bolsters the threat of a disorganized flight to safety — exactly the conditions the greenback prefers.”

The Fed has indicated the tapering of its stimulus would depend on the strength of the U.S. economy, and BK Asset Management managing director Kathy Lien said the retail-sales report due later in the day marked “the last piece of data that could sway the central bank’s decision” ahead of next week’s meeting.

“Consumer spending is the backbone of the U.S. economy, and even if job growth has been modest, if spending is strong, the Fed can confidently taper asset purchases this month,” she wrote Thursday.

Economists surveyed by MarketWatch expect August retail sales to rise 0.5% after July’s 0.2% gain. The numbers were due for release at 8:30 a.m. U.S. Eastern time.

The dollar’s gain on Friday was spread across most of the major currency pairs, with the Australian dollar AUDUSD -0.16%  easing to 92.49 U.S. cents from 92.60 U.S. cents, the euro EURUSD +0.08%  fell to $1.3288 from $1.3298. Analysts at Crédit Agricole forecast, however, some gains for the European currency ahead of the Fed decision.

The euro “should continue to grind higher today, shrugging off ongoing Italian political and associated European Central Bank policy concerns,” they wrote early Friday, adding that they were “surprised by the consistency of investor demand” for the European unit.

“We now look for [the euro/dollar pair] to target their Aug. 20 high of $1.3452 early next week ahead of Wednesday’s Fed policy announcement,” the Crédit Agricole analysts said.

The dollar also rose against the Japanese yen USDJPY -0.09%  to ¥99.72 from ¥99.44 late Thursday.

Meanwhile, the British pound GBPUSD +0.38%  inched up to $1.5807 from $1.5803.

Source: MarketWatch

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