Currency Upmanship

If Ben Bernanke's goal with his remarks on last Tuesday was truly to strengthen the dollar, he should have made sure that his European counterpart Jean-Claude Trichet was not going to steal his thunder and mess it all up 3 days later.

In what seemed like an exercise in one-upmanship between the two central bankers, Bernanke's assured his audience on Tuesday that, "in collaboration with [his] colleagues at the Treasury, [he] continues to carefully monitor developments in foreign exchange markets" and that he will be "ensuring that the dollar remains a strong and stable currency".

This came as quite a shock to most market participants as that was the first time the Fed chief had ever mentioned the dollar. Talking up the dollar has traditionally been the job of the Treasury Secretary, most recently Hank Paulson with his robotic, repetitive, ineffective (and maybe a tad insincere) declarations that "we believe in a strong-dollar policy". The thinking went that, if Bernanke himself was saying it, it probably meant some kind of shift in Fed policy was in the making and a decent dollar rally ensued (see EURUSD chart above).

But then what do you know, a few days later, Trichet, not to be outdone and ditching his customary ECB-speak for once, all but telegraphed a July rate hike "to prevent [the dreaded] second-round effects and ensure that risks to price stability over the medium term do not materialise" (this part was ECB-speak). This, needless to say, sent the Euro flying and the dollar diving, reversing the Bernanke dollar rally as can be seen in the 30-minute chart above.