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DJIA, Yen Crosses Tumble On Bernanke’s Testimony

The top contestant in the currency portion of the contest continues to leave the other traders in the dust, as he made $8,440 on Monday to bring his portfolio up to $441,714.33. As we discussed in yesterday’s Currencies Update, this trader’s strategy of executing EUR/USD positions and holding them for only minutes at a time has served him quite well, as he has managed to avoid large moves in the currency markets and rake in massive profits.

What are the other contestants in the top 3 doing to stay ahead? Contestant number 2 made over $20,000 on Monday by trading USD/JPY, which brought his portfolio balance up to $297,373.73. He sold the pair late last week and benefited from yesterday’s drop toward 106. Likewise, contestant number 3 sold USD/JPY on July 3 and finally closed out the position last night with a net profit of nearly $10,000. However, it appears that both of these contestants missed the big move in USD/JPY, as the Japanese yen crosses have collapsed across the board amidst declines in global stock markets overnight and bearish commentary by Federal Reserve Chairman Ben Bernanke this morning.

Indeed, Federal Reserve Chairman Ben Bernanke's semiannual testimony on monetary policy to the Senate revealed increasingly pessimistic views on the US economy, and mounting concerns about rising inflation pressures. Mr. Bernanke noted the "considerable stress" that financial markets and institutions remain under and the concerns surrounding the health of Fannie Mae and Freddie Mac. Nevertheless, the Federal Reserve appears ready to do whatever it needs to do, as Mr. Bernanke said that "healthy economic growth depends on well-functioning financial markets and "helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."

Focusing on the economy specifically, Mr. Bernanke mentioned the weakness in the labor markets, housing sector, stagnation in real earnings, tightening of credit conditions, and sharp drop in consumer sentiment, all of which is likely to restrain consumer spending "over coming quarters." Meanwhile, inflation remains of great concern, and according to Mr. Bernanke, "FOMC participants viewed the inflation outlook as unusually uncertain and cited the possibility that commodity prices will continue to rise as an important risk to the inflation forecast." The greatest concern, however, is that increasing prices "might lead the public to revise up its expectations for longer-term inflation."

Overall, instability in the financial sector and looming downside risks to the economy create perilous conditions for the US, and despite the threat of rising inflation, the Federal Reserve has little room to fight that threat with increases to the fed funds rate. Furthermore, with the economic slowdown likely to quell domestic demand, inflation pressures are likely to ease on their own over time.

Terri Belkas, Currency Analyst for DailyFX.com