Greenspan Sends Greenback Higher in Europe

The dollar spiked higher as stops were triggered with the help of Federal Reserve Chairman Alan Greenspan's testimony before the Joint Economic Committee of Congress.

The market was predisposed to focus on anything Greenspan would say about the outlook for inflation, growth, and/or the trajectory of monetary policy, in light of the recent comment by the Dallas Fed president suggesting that the FOMC was in the eighth innning of the tightening cycle.

While seeming to dismiss concern about labor costs, he did appear to suggest that low interest rates themselves may fuel inflation.

This coincided with the euro's inability to rise above the $1.2250 level, encouraging European players to liquidate longs ahead of the close in London. Stops were triggered as the euro fell through $1.2200 and is now recovering from near $1.2175. That means that thus far, the year's low recorded on the Dutch rejection near $1.2155 remains intact. That low still seems vulnerable in afternoon trading in the U.S. markets.

Still, with technical indicators still a bit overstretched and the U.S. trade balance due out tomorrow, players may be reluctant to really extend substantial short euro positions now.

Mixed data from the U.K. earlier today -- wider trade deficit and stronger industrial output figures -- and the Bank of England standing pat, left sterling steady until the euro's breakdown took its toll. Support in the $1.8180-$1.8200 area was taken out, but a good bid was found near $1.8175. The sterling looks like a reasonable way to pick a top in the dollar -- i.e. buying sterling near $1.8200 now with a stop below $1.8170, in anticipation of a move back toward $1.8260-70.

I don't have a strong view on the yen at this juncture. Carry trades seem back in favor and while this would seem to weigh on the yen, Japanese exporters appear to be slowing the dollar's rise in front of the 108 yen area.

The bottom line is that I'd be more inclined to fade this move higher in the dollar. A Fed hike later this month is a done deal, as nearly everyone recognizes. Greenspan still keeps his cards near his vest.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years. He has worked at economic consulting firms and at global investment banks. Most recently, Marc was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. In September 2004, Chandler started a financial consulting firm, Terra K Partners, LLC. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.