US Dollar Slumps Amidst Uncertainty Over Fiscal Stimulus, Ahead of Testimony by Treasury’s Geithner, Fed’s Bernanke

The greenback ended Monday broadly lower against the majors, as the US dollar index continues its nearly month-long consolidation below the January highs. There was little in the way of news to help drive price action, but the outlook for the currency continues to hinge upon the status of risk appetite. The biggest unknown that could impact risk trends is the status of the $800+ billion fiscal stimulus bill that has been passed by the House, but still needs approval by the Senate. A vote is expected early this week, but even if it does pass, the bill must be reconciled with the House version as many changes have been made. Nevertheless, a failure of the bill in the Senate could have particularly nasty repercussions for sentiment, and could translate into a sharp US dollar rally.

As far as defined event risk goes, US Treasury Secretary Timothy Geithner is scheduled to testify on the oversight of the Troubled Asset Relief Program (TARP) in front of the Senate Banking panel at 10:00 ET on Tuesday, but the most market-moving commentary could come later on. At 11:00 ET, Mr. Geithner is due to speak about the White House’s financial rescue plan and new guidelines for TARP. Then, at 13:00 ET, Federal Reserve Chairman Ben Bernanke is scheduled to testify in front of the House Financial Services Committee on the central bank’s lending programs. If Mr. Geithner’s or Mr. Bernanke’s comments reflect bearish prospects for the financial markets and global economy, flight-to-quality and deleveraging could spark demand for Treasuries, the US dollar, and Japanese yen. A more likely scenario, though, may be for Mr. Geithner’s plans to deal with troubled assets to boost risk appetite, and subsequently lead stocks and equities higher.

Euro Ends Monday Mixed as Yield Differentials Drive Price Action

The euro started out this week just as it ended Friday: down against the Australian dollar, New Zealand dollar, and British pound but up versus the Japanese yen, US dollar, Swiss franc, and Canadian dollar. There was little in the way of European releases, but improved forex market risk appetite has benefited currencies with central banks that either maintain relatively high interest rates (Australia, New Zealand) or banks that have signaled that they will leave rates steady going forward (UK). On the other hand, currencies associated with interest rates near zero (US, Japan, Switzerland) or with interest rates that have the potential to fall lower (Canada) tumbled. The euro happens to fall right in the middle of this spectrum since the European Central Bank left rates at a relatively high 2 percent last Thursday, but suggested that they may cut rates in March. This dynamic will likely hold over the next few weeks, making risk trends increasingly important to watch, as well as technical levels.

British Pound Nears Resistance at 1.50, Key Event Risk Looms on Wednesday

The British pound was very strong against the US dollar and Swiss franc on Friday, though the currency fell against the New Zealand dollar. There were no major economic releases on hand, but news that second-half profits by Barclays’ - the third largest UK bank by assets - beat forecasts certainly bodes well for the UK’s financial sector. Looking ahead, the next major piece of event risk looms on Wednesday as jobless claims in the UK are anticipated to rise for the twelfth consecutive month in January, adding to evidence that the combination of a slowing global economy, sharp declines in domestic consumption, and the continuous collapse of the UK housing sector are bound to make the UK economic contraction extend for a lengthy amount of time. Indeed, the jobless claims change is anticipated to rise by 88K, the largest single-month gain since 1991, and while this could impact the British pound upon release at 4:30 ET, the announcement of the Bank of England’s Quarterly Inflation Report may be more important. The BOE’s latest policy statement suggests that the Monetary Policy Committee may opt to leave rates unchanged at 1 percent going forward, but if the report shows that this isn’t the case, the British pound could sell-off.

Canadian Dollar Still the Weakest of the Commodity Bloc as Housing Starts Tumble to 7-Year Low

The Australian and New Zealand dollars have been some of the strongest of the major currencies as risk appetite seems to be thriving in the forex markets. However, the Canadian dollar ended the day virtually unchanged from Friday’s close as Canadian housing starts tumbled 11 percent in January to an annualized rate of 153,500, marking a more than seven year low. The building of single family homes in urban areas took the biggest hit as they fell 20.3 percent during the month, while multi-family starts dropped 12.2 percent. This report comes on the tails of Friday’s labor market report, which showed that the number of employed Canadians fell a record 129,000 in January, suggesting that the economy is in for a deep slowdown and lower interest rates since the Bank of Canada left the door open for more accommodative monetary policy after reducing their target overnight lending rate in January.

Terri Belkas is a Currency Strategist at FXCM.