17-Year-High Cost-of-Living Surge Worries Bernanke, Too

Includes: ERO, FXF, UDN, UUP
by: Grace Cheng

After the sharp decline of the US dollar yesterday, traders have been taking profit on their dollar short positions today, spurring an upward retracement against major currencies such as the Euro and Swiss franc. Today we got more indications of the discomfort experienced by Americans when it comes to their spending power. The latest government-released inflation data showed that US consumer prices rose by the biggest amount (on a monthly basis) since 2005, increasing 1.1% in June, following a 0.6% rise in the prior month. The majority had only expected a 0.7% gain. No thanks to the soaring price of crude oil, this 1.1% increase in the cost of goods and services in the US is almost double the inflation recorded in May. Compared to a year ago, prices have actually increased by 5%, the most since May 1991, more than the 4.5% increase expected.

These glaring numbers are cementing the widespread inflation woes in the US, which are largely caused by the 90% increase in the price of oil in the past year. Gasoline in the US averages $4 a gallon and is on the rise. If you are postponing or planning to have a shorter summer drive holiday, then you aren’t alone, for many others are feeling crimped in their pockets too.

Another Complication For The Fed

The higher cost of living is one of the concerns faced by the Fed, but are they going to do anything about it? It will be very very difficult for the Fed to raise interest rates in the near future as that would put pressure on already troubled companies like Freddie Mac (FRE) and Fannie Mae (FNM), which would be further squeezed by rising borrowing costs and rising mortgage defaults. Yesterday, although Bernanke said that inflation “seems likely to move temporarily higher in the near term”, he said that “helping the financial markets return to more normal functioning will continue to be a top priority.”

Apparently, Bernanke has two opposing “top priorities”. In Bernanke’s second-day testimony to the Senate today, Bernanke said that inflation is currently too high and lowering inflation is top priority. With these two “top priorities”, the Fed is between a wall and a hard place. Helicopter Ben will need his full 007 gear for this one, but can he pull it off?

Dollar Recovers As Oil Tumbles

Today the US dollar is likely to consolidate its previous day’s losses against other currencies on the better-than-expected industrial production data and on a decline of crude oil to below $133 a barrel after latest data showed US crude inventories were up. US industrial production rose 0.5% in June versus 0.1% gain expected, after falling 0.2% in May.

EUR/USD is now heading toward the low end of 1.5800s, and if the pair drops below 1.5800, it could next target 1.5750-60. USD/CHF is close to erasing all of its losses from yesterday. Nearest resistance is around 1.0220-50. Nearest support around 1.0010.

Economic Calendar For Thursday:

Swiss ZEW survey 0900 GMT

US housing starts, initial jobless claims 1230 GMT

US Philly Fed 1400 GMT

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