Fed Talk Helps Dollar Recover

Speculation that the Fed may on the verge of changing the wording of its guidance as early as tomorrow's testimony by Fed Chairman Bernanke before the Joint Economic Committee of Congress may be giving the dollar an extra boost in the North American morning.

It has been recognized that some regional Fed presidents are a bit more hawkish, if such designations are meaningful when the Fed funds target is 0-25 bp and no one is really calling for a hike now or in the immediate future. It seemed that more recently some Fed officials have explained the at the words "extended period" is more conditional than those who have been suggesting it means 4-6 months.

That means that even if the wording is modified, there may not be a substantive change in rate expectations. We note that while the dollar appears to have strengthened on the speculation, the Fed funds futures strip is barely changed on the day--less than 1 bp.

In any event, it would seem unlikely that the Bernanke would use his testimony to pre-announce a change in the wording of the next FOMC statement. There does not seem to be much to gain. That said, the speculation means that market participants will be closely listening to what the Chairman says and if he doesn't repeat that mantra, then the market may respond more convincingly.

The dollar is making new session highs against the euro, and is generally firm, as European traders are winding things up for the day.