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Larry Summers announced his withdrawal from the candidacy as Chairman of the Federal Reserve. He does not wish to undergo a tough approval process. Given his problematic past, that certainly is understandable.

For the dollar, this translates into a downfall: Summers was already seen as the leading candidate, and he is considered less dovish than the other leading candidate, Vice Chairman Janet Yellen. The result is a weaker dollar at the start of an already dramatic week.

The markets currently see Yellen as Bernanke’s heir and as a supporter of Bernanke’s dovish policies, she is seen as dovish as well – some that would lead a slow tapering of QE and slow unwinding of historically loose monetary policies.

As noted, the Fed chairman’s name is of high importance for the dollar: Summers, dollar up, Yellen, dollar down.

Summers pushed through deregulation in the 90s, moves that contributed to the financial crisis. He never regretted it, while Clinton did. He also was on Obama’s initial economic team, an was criticized for not pushing enough stimulus at the wake of the crisis. While he is considered a smart person with a lot of public experience, this experience isn’t necessarily positive, to say the least.

Yellen didn’t win the top position, not yet. There is another candidate, Donald Kohn, and also Bernanke could continue despite the clear message that he is on his way out.

In less than 3 days, Bernanke and his associates will decide on monetary policy once again, in a decision that will probably feature a change: tapering of QE. The odds are high for this hawkish shift. Even if Bernanke insists that this is not tightening, it is a significant change in policy, to the hawkish side.

Currency reactions

(click on the links to see the weekly outlooks)

  • EUR/USD gaped to 1.3350 and continues advancing. Merkel’s ally in Bavaria, the CSU, won regional elections, but the coalition FDP partner lost ground.
  • GBP/USD jumped above 1.59. Recent figures from the UK support a strong pound, regardless of QE tapering.
  • USD/JPY fell below 99. Talk about fiscal and monetary stimulus in Japan could keep the pair bid.
  • AUD/USD also made a Sunday gap higher, but is capped by the 0.9344 line so far. It made a false break above this line last week, and could fail here once again.
  • USD/CAD falls to support at 1.03. The Canadian dollar has reasons to rise – the excellent jobs report in particular.

This is a weak start for the dollar, but QE tapering will overshadow these movements. Stay tuned for a preview for the big event.

In the meantime, here is an article of interest:  Fed tapering could trigger new financial crisis