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Dollar Bears Brunt of Fed Remarks


NEW YORK ( TheStreet) -- The slaughter of the dollar continued through U.S. trading Thursday, as the Federal Reserve and its chairman Ben Bernanke's dovish remarks fuelled the carry trade and momentum trading.

In a carry trade, investors fund the buying of higher yielding currencies after borrowing and selling lower yielding currencies.

The U.S. dollar index was falling 0.3% to $73.13; moderately stronger after the onslaught that occurred in U.S. trading Wednesday afternoon and far eastern European trading overnight. PowerShares DB US Dollar Index Bearish (UDN) was ahead by 0.2% to $29.17.

"I think the U.S. dollar is certainly going to suffer right across the board, except probably against the Japanese yen," said Dean Popplewell, OANDA Corp.'s Chief Currency Strategist. "This is what investors are currently using with the Fed stance and what they perceive to be on hold for the next couple of meetings."

"It's basically open season for a much weaker dollar ... It's certainly promoting the carry and momentum trading strategies that we're seeing at the moment."

The U.S. dollar and yen have officially become funding currencies for high-yielding, commodity-sensitive currencies such as the Australian dollar and New Zealand dollar, or so-called "kiwi." The Australian dollar yield is particularly attractive at 4.75%. Among the G7 currencies, more and more OANDA clients desire the euro, especially given recent hawkish European Central Bank comments.

CurrencyShares Australian Dollar Trust (FXA) added 0.5% to $109.61, while WisdomTree Dreyfus NZ Dollar Fund (BNZ) lost 0.8% to $24.46. CurrencyShares Japanese Yen Trust (FXY) rose 0.6% to $121.10.

The yen continues to stay weak after the G7 group of industrialized nations' coordinated maneuver to stem the yen's appreciation last month and Standard & Poor's downgrade of Japan's long-term rating outlook to negative from stable, due to risks of fiscal deterioration following the massive earthquake that devastated the country.

The OANDA chief currency strategist says the market is targeting, for the medium term, $1.50 for the euro-U.S. dollar currency pair and $1.10 for the Australian dollar-U.S. dollar currency pair. However, Popplewell notes that these currency pairs have so far reached projections much quicker than the expected, which may mean the trades have been overextended; this could lead to a short-lived relief rally for the U.S. dollar, according to the strategist.

Once the euro-U.S. dollar breaks through $1.50, the pair opens its way towards $1.55, especially in light of hawkish ECB rhetoric, he added. CurrencyShares Euro Trust (FXE) was up 0.2% to $147.67.

On Wednesday, Federal Reserve chairman Ben Bernanke held his first press conference after a policy meeting. During the event, Bernanke discussed the outcome of the Federal Open Market Committee's two-day meeting, reiterating an earlier release stating that the FOMC (Federal Open Market Committee) would keep interest rates unchanged at 0% to 0.25% and would complete its plan to buy $600 billion of long-term securities by June, as planned.

While taking questions from the press, Bernanke said the Fed's use of the "extended period" language is dependent on resource slack and expectations for inflation.

"I think most people are not frustrated with what he said," Popplewell remarked. "It was very much as expected. It just gave the market certainty -- the green light to increase their risk tolerance and focus on carry and momentum trading strategies."

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-- Written by Andrea Tse in New York.



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Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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