Bernanke Needs to Talk Tough
With the nomination of Ben Bernanke as the next Federal Reserve Chairman, the reactions of the stock and currency markets may diverge, but for the same reason.
Though it may be argued that he was merely carrying a message to markets on behalf of the Fed, the fact remains that it was Bernanke who made that infamous remark about the Fed's printing presses in November of 2002; it is a comment from which he should actively work to distance himself. That high-profile statement has not been forgotten and it suggests that when in doubt he will lean toward the side of a loose, inflationary monetary policy. While equities markets may welcome such a "stimulative" mindset, currency markets will likely treat Bernanke with great suspicion, particularly with regard to the U.S. Dollar.
With the Dollar in a mildly overbought technical condition and the Euro very oversold and resting on some measure of chart support, this nomination alone could well lead to a near-term rally in the Euro and corresponding weakness in the USD. To prevent any such reversal from becoming a longer-term trend, Bernanke should make a point of talking tough about the course of U.S. monetary policy.
After underestimating it all year, markets have come to respect the resolve of the Greenspan Fed's tightening course, with some believing the Fed Funds rate may go all the way toward 5% before this cycle is finished. With Bernanke, the market will expect no such thing. In fact, the currency market will adjust its thinking, believing that the new Fed chief will not only be quicker to halt rate increases, but quicker to cut them, as well. To counteract such conclusions and their negative implications for our not-yet-out-of-the-woods currency, Bernanke needs to speak clearly in support of the current tightening phase and his conviction in carrying it forward in order to distance himself from that printing press comment, which currency traders won't easily forget.
Without such tough talk (and actual follow-through), the U.S. Dollar's rise in 2005 may turn out to be nothing more than a counter-rally, after all.