Firmer US Dollar Tone in Play

Although yesterday's dollar gains have not been extended, the underlying tone remains relatively firm. There are two fundamental currents that are aiding what appears to be largely a technically inspired move. First, there has been a modest firming of short-term US interest rates in recent days. And some observers are linking this to speculation that next week's FOMC statement may modify or drop the phrase about rates being exceptionally low for an extended period of time. The justification for the shift will ostensibly be to address inflation and boosting confidence in the Fed's commitment to price stability. This would be consistent but different than the second current, highlighted by famed Fed watcher Steve Beckner. In a report yesterday Beckner of Market News noted that last week Bernanke broached the dollar topic without being instigated. Beckner connects recent comments by Geithner and Yellen as well and suggests this is part of a new offensive that will underscore the Treasury Secretary has called a commitment "to do everything we can to sustain confidence in the dollar". The new rhetoric, Beckner suggests, will go beyond simply reiterating the strong dollar mantra. It is not so much a case of strong dollar policy on steroids, as Beckner is also clear that officials are not so concerned about the recent decline in the dollar as in the change in monetary policy to defend it; more like the strong dollar policy on antibiotics. This is consistent with the spirit of what our Washington contacts have implied and with what I advocated at the recent Bloomberg foreign exchange conference. Of course, I don't expect changed rhetoric to have immediate impact, but it is, I suspect, a necessary even if not sufficient part of a larger dollar recovery story.