Dollar: Stronger Philly Supports Case for Tapering

With the first day of Bernanke's Testimony on Capitol Hill now behind us, the U.S. dollar has resumed its rise. USD/JPY is back above 100, the EUR/USD below 1.31 and the AUD/USD below 92 cents. This rebound in the greenback should not be surprising considering that the Federal Reserve still plans to taper asset purchases this year. We don't expect any new revelations to come on Day 2 of Bernanke's testimony, which means that the time main takeaway from the Fed Chairman's time with Congress is that Bernanke is in no rush to raise rates and while reducing asset purchases is their intention, there is no preset course for how that could happen. On balance, this still leaves Fed policy less dovish than many other central banks around the world, which is why investors are snapping up dollars this morning.

The optimism in yesterday's Beige Book report was reinforced by today's releases. The central bank said that hiring is steady or increasing at a measured pace in most Fed districts which is reinforced by the decline in jobless claims. For the week ended July 13, claims dropped to a 2 month low as the effects of auto plant shutdowns begin to ease. However continuing claims rose to 3.114 million from 3.023 million to its highest level in 5 months. Nonetheless, we are still seeing gradual improvements in the labor market, which support the case for a reduction in asset purchases. The Philadelphia Fed survey also surged from 12.5 to 19.8, its strongest reading since March 2011. The significant improvements in NY and Philadelphia manufacturing conditions are also consistent with the Beige Book report. The only dampening data was leading indicators, which was flat in June but we don't think that will affect the central bank's bias to ease.

Looking ahead, we expect the dollar to continue to rise but with the greenback nearing key resistance levels, it will be interesting to see if there is enough momentum to push higher.