NEWS / Foreign Exchange

major dollar exchange rates continue to ply the ranges

Fed Chairman Bernanke spoke yesterday about the U.S. economic outlook to the Joint Economic Committee of Congress, and he said that "the economy appears likely to continue to expand at a moderate pace over coming quarters." He also said that "although core inflation seems likely to moderate gradually over time, the risks to this forecast are to the upside." In sum, Bernanke gave no indication that a rate cut is on the table, which caused the stock market to swoon in the immediate aftermath of his remarks.

However, Bernanke seemed to be more uncertain about that outlook than he did a few months (or even a few weeks) ago. He noted that the problems in the subprime mortgage market could have wider spillover effects, and he acknowledged that capital spending may not grow to the extent that the Fed is forecasting this year. The second risk seemed to be underscored by weaker-than-expected data yesterday on durable goods orders in February. The downside risks to the Fed's view should not be ignored, and the Fed surely would ease policy if the economy should begin to stall. (For more on Bernanke's testimony, see our special report that is posted at www.wachovia.com/economics.)

In general, major dollar exchange rates continue to ply the ranges that have prevailed over the past two weeks or so. In our view, the probability of a breakout over the next few days seems rather low. The only items on the docket today are the third (and final) look at fourth quarter GDP data, which will be ignored, and the weekly series of initial jobless claims. Tomorrow is a bit more exciting with personal income and spending data, the Chicago PMI, the University of Michigan's index of consumer confidence, and construction spending data. However, these data releases will probably not lead to a wholesale rethinking of near-term U.S. economic prospects. Thus, we expect that trading in currency markets should remain rather quiet.