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US Dollar Struggles for Direction on Jerome Powell Testimony, May Retail Sales

June 16, 2020 at 16:41 by Andrew Moran

A rolled dollar bill with some banknotes on the backgroundThe US dollar is struggling for direction on Tuesday as the stock market rallies. Investors are weighing multiple events unfolding, including the Federal Reserve Chair’s semi-annual congressional testimony, strong May retail sales figures, and a spike in equities. It has been a roller coaster ride for the greenback in recent weeks as volatility and uncertainty have returned to global financial markets.

Fed Chair Jerome Powell addressed the central bank’s aggressive monetary push in front of lawmakers. He defended the Fed’s recent announcement to acquire individual corporate bonds, in addition to purchasing them through exchange-traded funds (ETFs). Although the Fed had signaled this move in March, the Eccles Building said it is following through on its commitment. He noted that it would allow the market to dictate the pace of its buying endeavors.

Some critics may argue that it is the Fed taking over the market, but Powell called it “an excess of caution to preserve these gains for market function by following through” on past pledges. The bond-buying spree is part of its $750 billion Secondary Market Credit Facility, but he did not turn down the idea of it being an open-ended program.

I don’t see us wanting to run through the bond market like an elephant snuffing out price signals, things like that.

Powell expressed “significant uncertainty” regarding the US economic recovery in the aftermath of the coronavirus pandemic. He specifically listed small businesses, low-income Americans, and minorities that face the most amount of risk on the long road to recovery. This is a reiteration of what he noted last week after the June Federal Open Market Committee (FOMC) policy meeting.

The levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery. Much of that economic uncertainty comes from uncertainty about the path of the disease and the effects of measures to contain it. Until the public is confident that the disease is contained, a full recovery is unlikely.

The pandemic is presenting acute risks to small businesses. If a small or medium-sized business becomes insolvent because the economy recovers too slowly, we lose more than just that business. These businesses are the heart of our economy and often embody the work of generations.

Powell doubled on the Fed’s commitment to employing every measure within its power to support growth and aid the recovery. He stopped short of naming these policy mechanisms, but if its unprecedented action in recent months, anything could happen.

Financial markets were booming on Tuesday after the US Census Bureau reported that retail sales spiked 17.7% in May, up from a 14.7% contraction. The market had penciled in a gain of 8%. The biggest increases were seen in apparel (188%), furniture (89.7%), electronics (50.5%), automobiles (44.1%), and food and beverage (29.1%).

Last month, industrial output rose 1.4%, manufacturing production advanced 3.8%, and capacity utilization jumped to 64.8%. Business inventories slipped 1.3% in April.

The US Dollar Index, which measures the greenback against a basket of currencies, climbed 0.38% to 97.07, from an opening of 96.56. The index had risen as much as 4% this year before paring most of those gains in the last couple of months. Year-to-date, the index is up just 0.6%.

The USD/CAD currency pair dipped 0.08% to 1.3564, from an opening of 1.3572, at 16:22 GMT on Tuesday. The GBP/USD slipped 0.17% to 1.2584, from an opening of 1.2604.

If you have any questions, comments, or opinions regarding the US Dollar, feel free to post them using the commentary form below.

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