Dollar Firm After Bernanke And FOMC Minutes, Commodity Currencies Tumble

Markets were rocked by speculations whether the Fed would taper the stimulus program early. The DOW jumped to a record high of 15542 after Bernanke's testimony, which suggested that Fed is not near to scaling back the open-ended asset purchase. However, stocks reversed and dropped sharply to close down -80 pts. The latest FOMC minutes were also released. A number of participants are willing to adjust the flow of purchases downward as early as the June meeting if data indicates sufficiently strong growth. Asian markets followed, and were weighed down by weak Chinese manufacturing data. The dollar remains generally firm, in particular against commodity currencies.

Fed Chairman Bernanke said in his speech that labor market conditions "have shown some improvement recently" but still remain "weak overall". He also stated that "in present circumstances, with short-term interest rates already close to zero monetary policy does not have the capacity to fully offset an economic headwind of this magnitude" and the government need to implement "policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run". Yet, concerning tapering QE, Bernanke stated that if policymakers see sustainable improvements in the economy, "a step down" in the pace of purchases "in the next few months" might be warranted. Although he stressed careful consideration would be taken on this issue, the market responded vigorously after this comment.

The FOMC minutes for May's meeting appeared less dovish than Bernanke's comments. Yet, little information was added. The minutes suggest that policymakers saw modest improvement in the economy and the job market. A number of participants continued to believe that risks to growth remained skewed to the downside. Concerning the conditions for the slowing down the pace of asset purchases, policymakers generally viewed that more confidence in continuous economic growth or diminished downside risks would be the keys. It's noted in the minutes that "(A) number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by the time showed evidence of sufficiently stronger and sustained growth", without explaining what "evidence" means in details.

In China, the preliminary reading of HSBC manufacturing PMI dropped to 49.6 in May. That's the first contraction reading in seven months. The HSBC noted that the "cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds". It warned that "a sequential slowdown is likely" in Q2 which would cast "downside risk to China’s fragile growth recovery." The final reading will be released later on June 3, and the official manufacturing PMI will be released on June 1.

Looking ahead, PMI data from Eurozone will be a major focus today and mild improvement is generally expected. UK will release revision of Q1 GDP. From US, jobless claims, new home sales and house price index will be featured.