The Forex Daily Digest – July 22, 2009

U.S. stock markets gained on a late run yesterday as Caterpillar and Merck helped the Dow Jones Industrial Average to its seventh straight gain. The Dow rose to its highest close since Jan. 6th.

The USD has a good day against most other major currencies, as comments by Fed Chairman Bernanke eased anxiety that policy-makers would not act decisively to head off inflation produced by efforts to counter the credit crisis. One analyst said after Bernanke’s presentation that the Fed chairman's appearance before the House Financial Affairs Committee was "favorable for the dollar."

Bernanke said that the unusual policy measures that have been in response to the current financial crisis "can be withdrawn in a smooth and timely manner as needed, avoiding the risk that policy stimulus could lead to a future rise in inflation." In his presentation, Bernanke outlined the methods the Fed could possibly relax its various lending programs. But he didn't offer a timeline for when the central bank might do so. He speaks before the Senate today.

There are concerns that the Fed fundamentally has a blank check and that printing more money to fix the financial system will ultimately lead to a substantially devalued USD and increase the possibility of inflation. The USD rallied earlier this year because of the view that it was a safe haven currency.

The continuing recovery in stocks, prompted by a series of positive earnings reports, is supporting a broad recovery on higher yielding currencies. But the current rally on riskier assets can’t last forever. Anticipate a reversal in stocks and commodities as traders take their profits. Economists all over the world are questioning whether the economy can continue to expand based only on stimulus plans paid by tax-payers money.

The AUD could be looking at selling pressures as economists forecast the annual rate of inflation to fall to a 10-year low of 1.5% in the second quarter. They are also expecting a drop in consumer prices which could strengthen speculation for lower borrowing costs as the central bank maintains a softer outlook for price growth.

On the economic calendar today, expect the Crude Oil Inventory report at 10:30 am (Eastern Time). The inventory was down 2.81 million barrels last week. Major earnings expected to be released today include Morgan Stanley, Piper Jaffray, Delta Air Lines, eBay, Altria Group, GlaxoSmithKline, Eli Lilly, and Boeing.

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Happy Trading,

James Dicks