FOREX: Dollar to Rise as Fed Beige Book Underscores Bernanke Speech | Learn Forex | GoLearnForex.com

• Dollar, Yen Outperform as Asian Stocks Follow Wall Street Lower
• Aussie Dollar Bears Brunt of Risk Aversion on Soft Rates Outlook

Critical Levels

The Euro and the British Pound declined overnight, down as much as 0.3 and 0.2 percent against theUS Dollar, as the greenback capitalized on broad-based risk aversion across the financial markets (see below). We continue to look for EURUSD selling opportunities.

Asia Session: What Happened

The US Dollar and the Japanese Yen outperformed overnight, adding as much as 0.3 and 0.6 percent against its major counterparts, as stocks fell in Asian trade to boost safe-haven demand for the former currency while encouraging an unwinding of carry trades funded in the latter. The MSCI Asia Pacificregional stock index fell 0.3 percent, with investors unnerved by worrying remarks from Ben Bernanke.

The Federal Reserve Chairman simultaneously sounded the alarm about “uneven” and “frustratingly slow” recovery and apparent dismissal of further stimulus, with emphasis placed on limiting inflation and an allusion to the “prospect of increasing fiscal drag” on the economy (implying the Fed is expecting US Treasury bond yields to rise as QE2 expires). The weakness in US demand implied in the speech bodes ill for Asian exporters, which count on the world’s top consumer market as a key contributor to their bottom line.

Reasonably enough, the sentiment-sensitive commodity bloc currencies bore the brunt of the selloff, with the Australian Dollar underperforming considering the RBA now offers the least scope for rate hikes over the coming year versus its counterparts in Canada and New Zealand according to investors’ priced-in expectations as tracked by Credit Suisse.

Euro Session: What to Expect

Euro Zone Gross DomesticProduct and German Industrial Production figures headline a quiet calendar on tap for the European session. The former report is expected to confirm early estimates pinning the region’s economic growth rate at 2.5 percent in the first quarter while the latter is expected to reveal a slowdown in April, with output rising just 0.2 percent to yield the smallest increase in four months.

On balance, risk sentiment is likely to remain the key driver of price action as markets continue to reel from the dual reality of slowing US growth and little scope for further stimulus outlined yesterday by Fed Chairman Ben Bernanke. This vision is likely to be reinforced as the US central bank releases its Beige Book regional economic conditions survey, pointing the way lower for the spectrum of risk-sensitive currencies and boosting the US Dollar and Japanese Yen.

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