The U.S. dollar was generally firmer in its major crosses but its gains were checked by uncertainty ahead of key testimony tomorrow by Fed Chairman Ben Bernanke. Investors will comb through the Chairman’s testimony before the House Economic Committee tomorrow for any clues that the head of America’s central bank is beginning to soften his long-held position for continued aggressive monetary stimulus. Recent economic data has highlighted a nascent recovery in the U.S. economy, with improvements in labor markets particularly encouraging for investors. Commentary from Fed speakers has revealed that a growing number of policymakers are increasingly concerned about the possible negative consequences of the bank’s $85 billion in monthly asset purchase. Any hints that Bernanke is becoming more open to winding down quantitative easing later this year would add to the greenback’s broadly improved tone.  

The euro hovered just above last week’s six-week low against the greenback overnight. Investors await tomorrow’s testimony by Mr. Bernanke for further clues on the outlook for U.S. monetary policy and for the dollar. With the ECB widely expected to ease monetary conditions in the 17-member bloc further in the months ahead, the improving yield appeal of the dollar over the euro should continue to keep it biased higher.   

The yen fell back toward a four and a half-year low against the dollar after Japan’s economy minister seemed to backtrack a bit on dovish comments from the previous day. The BOJ started its two-day meeting overnight and is not expected to make any adjustments to monetary policy at this time. Still, the yen remains vulnerable to the sheer scale of the BOJ’s historic monetary easing plan.

The British pound slid to a seven-week low against the dollar after inflation data overnight came in well below market expectations, which should give the BOE more room to ease policy if it sees the U.K. recovery stalling in the month ahead.         

USD: The greenback was generally firmer in tight ranges overnight as a relatively quiet trading session kept moves subdued. Traders were also wary of pushing major pairs too far from their overnight ranges ahead of tomorrow’s closely watched testimony by Fed Chairman Ben Bernanke before the House Economic Committee. With recent U.S. reports highlighting an improving pace of recovery, particularly in labor markets, speculation that the Fed will begin to wind down its massive asset purchase program later this year has mounted. An increasing number of Fed officials have also expressed concern that the bank’s QE program may be doing more harm than good to the economy. Any hint from the Chairman tomorrow that he too is growing more acquiescent to winding down the $85 billion in monthly Fed asset purchases would send the dollar broadly higher. Conversely though, if Mr. Bernanke sticks to his long-held position that the economy remains too weak to begin removing policy accommodation, the dollar would likely become vulnerable to a period of profit taking across the board.

EUR: The euro was largely stuck in a narrow range near last week’s six-week low against the dollar. Investors see increasing risk of additional ECB monetary easing in the months ahead. In contrast, the market increasingly sees the Fed’s next move as a scaling back of monetary stimulus. This week, investors will of course focus on Fed Chairman Bernanke’s comments tomorrow. In addition, the flash readings of euro zone PMI’s on Thursday will also be very closely watched. Recent deterioration in euro zone PMI’s have flagged the risk of a deepening recession across the 17-member bloc, which if confirmed in this week’s data, would all but cement expectations for more ECB rate cuts.

JPY: The yen fell back toward last week’s four and a half-year low versus the dollar after Japan’s Economics Minister seemingly backtracked on yesterday’s dovish comments. After saying the yen may have fallen far enough yesterday, Akira Amari said overnight that he hoped the currency would settle into a range that was beneficial to both importers and exporters. The BOJ kicked off its two-day policy meeting today, with no expectations for any changes to monetary policy at this time. Still, the yen remains vulnerable as Japanese institutional investors continue to be forced in search of higher yields in riskier assets abroad.     

GBP: Sterling fell to a seven-week trough against the dollar after data overnight showed much cooler than expected inflation in April. U.K. CPI fell to an annualized rate of just 2.4% from March’s 2.8%, well below market forecasts for 2.6%. The benign inflation backdrop gives the BOE room to ease monetary conditions further if the nation’s recovery fails to pick up steam in the months ahead.