Bernanke’s comments send dollar substantially lower

USD:

Last Wednesday, Chairman of the US Federal Reserve Ben Bernanke unexpectedly triggered a massive market move in the aftermath of the publication of the latest FOMC minutes. At a speech in Boston, Bernanke stated that the US central bank would not be in a hurry to raise short-term interest rates, even if the unemployment rate came down significantly.
He reiterated that the Fed has set an unemployment rate threshold of 6.5% for the first rate hike. Since the jobless rate was at 7.6% in June there is still a long way to go.

Bernanke furthermore stated the central bank will be in no rush to hike rates even if the 6.5% level is reached, which means nothing other than a zero interest rate for an extended period of time, even if the economy recovers.

The market will now closely listen to what Mr. Bernanke has to say when he is questioned during his semi-annual congressional testimony on Wednesday and Thursday. The so-called Humphrey Hawkins testimony will allow delegates from the House of Representatives and the US Senate question the Fed Chairman.

On Wednesday Bernanke will deliver his testimony before the House Financial Services Committee and on Thursday in front of the Senate Banking Committee. Any potential hint of a policy shift should impact the market substantially, as the market remains rather sensitive to "taper talk". Investors will be looking for further details as to the central bank's exit plan, as the Fed anticipates a stronger recovery in the second-half of the year.

EUR:
The recent talk about the Fed starting to taper its monetary stimulus in the not-too-distant future suddenly became out of fashion after Ben Bernanke's remarks last Wednesday. This supported the single currency and sent the US dollar into free fall. The EUR/USD rose more than 350 pips from the 1.2850 area to highs of 1.3210 early Thursday morning, until profit taking set in and the EUR/USD finished the week slightly above the 1.30 level. The downgrade of France from AAA to AA+ with a stable outlook by the rating agency Fitch last Friday did not impact the euro negatively as it was not a surprise to most market participants.

Against the Australian dollar the euro rose to fresh three-year highs last week, just shy of the 1.45 level, as the Australian currency continues to underperform its peers on fears of a future rate cut by the Royal Bank of Australia.

CHF:

After two weeks of consecutive losses against the euro, the Swiss franc managed to close last week in positive when seen against the single currency. The weakness in the pair was partly due to the underperformance of European equity markets during the last few weeks. The S&P 500 index in the US closed at an all-time high last Friday after seven consecutive gains in a row. European indices though were not able to keep up with their American counterparts. The German DAX 30 and the French CAC 40 did close higher for the week but are far off from their recent highs set at the end of May.
The EUR/CHF posted a high for the week at 1.2465 before correcting some of the gains and closing the week lower at 1.2362. During that move the opening gap from July 8th was closed. From a technical perspective we remain bullish on EUR/CHF as long as the pair holds at the 1.2280 level on a closing basis.

JPY:
Last week was the first week of yen gains after three consecutive weeks of losses against the greenback. Against the euro, the Japanese currency finished flat for the week. The inaction from the Japanese central bank and Bernanke's statement put an end to the weakness experienced by the yen over the previous three weeks. Furthermore, the Bank of Japan came out last week with an upbeat assessment for the Japanese economy, suggesting that BoJ Governor Kuroda may see little evidence supporting additional stimulus and this led support to the yen.

Gold:
Gold rallied almost five per cent last week posting its best weekly run since October 2011 supported by rising inflation concerns in China and Federal Reserve Chairman Ben Bernanke's likely continuation of the ultra-easy monetary policy, in the foreseeable future.

However as US economic data continues to improve, it will be difficult for the central bank to justify continued QE operations - a likely bearish outlook for bullion. The price of gold finished the week at $1,284.4 an ounce, compared with the previous Friday's close of $1,221.8 an ounce. In the short term we expect the gold recovery to continue towards the $1,350 area before the resumption of the overall bear-market trend.