Less Demand for Risk Supports Dollar Overnight

The U.S. Dollar is trading higher this morning ahead of another day oftestimony before the Senate Financial Services Committee by FedChairman Ben Bernanke.

The U.S. Dollar is trading higher this morning ahead of another day of testimony before the Senate Financial Services Committee by Fed Chairman Ben Bernanke.

Yesterday Bernanke told the Senators that the Fed has an exit strategy plan and that he doesn’t see inflation as being a problem because the Fed has to the necessary tools to combat it.

Today, expect Bernanke to get grilled once again about the Fed’s exit strategy, the future of interest rates and the possibility of inflation. Additional questioning may have to do with the Fed’s powers. Some Senators want to give the Fed more power while others want the Fed to continue to dictate monetary policy.

Better than expected corporate earnings the first two days this week have helped the U.S. equity markets rise, but have had almost no effect on increased desire for higher risk assets. This divergence could be indicating that the stock market is getting ahead of itself. Should equity markets continue to more substantially higher, Forex traders may be forced to make positions adjustments.

This will be particularly true in the Australian and New Zealand Dollars which have been moving virtually lock-step with the U.S. equity markets.

The EUR USD and GBP USD are having problems breaking out over the June highs. This is because traders are hesitant to print the high tick until they are certain the global economic recovery is occurring in the U.K. and Euro Zone regions. The U.K. is particularly vulnerable to downside risk because of rising unemployment and a severe budget crisis. In addition, traders are afraid to commit to the long side ahead of this Friday’s Preliminary GDP Report.

Weakness may develop in the USD CAD if equity markets continue to move higher and if crude oil prices rally. A bearish stock market combined with weakness in the crude oil market could help trigger a rally in the U.S. Dollar versus the Canadian Dollar.