What's in the Hole Ben?

It's going to be a long week with market observers deferring predictions until Fed Chairman Bernanke delivers his Jackson Hole speech on Friday. Between now and then economists and analysts will be trying to second-guess the likelihood and the impact of a third wave of quantitative easing. Optimism developed over the weekend that the Fed would be more likely to come to the rescue than not at this Friday's central bank symposium sponsored by the Kansas City Fed. The meeting presents Ben Bernanke with the opportunity to expand upon the full array of policy tools referred to in the August 9 FOMC policy statement. Anticipation amongst investors is running high that QE3 is just around the corner, which is a contributing factor to a weaker dollar to commence the week.

U.S. Dollar – The dollar index weakened on the expectation that Mr. Bernanke will promise to repeat a 2010 pledge to do whatever it takes to boost the economy. The feeling that the Fed's printing presses are running at high speed and the fear that inflation will once again gain traction are detracting from the appeal of the dollar, not to mention the lack of appeal from the perennial promise of a near-zero yield. The dollar's malaise could worsen during the week in anticipation of a fresh Fed rescue package. Although the start of the week saw a welcome report from the Chicago Fed whose national activity index remained below zero indicating contraction but at a far lesser pace. The July reading of -0.06 compares to a June reading of -0.46 but had the gauge been forecast to deliver a greater reading of contraction. All eyes are currently focused on a weakening economy but investors are admittedly peeking through clouded lenses. The recent S&P downgrade for the U.S. and Europe's sovereign debt crisis between them created a market thunderbolt during the last three weeks with admittedly some ugly economic reports. Until Bernanke dismisses the prospect of further easing on Friday, the dollar is likely to remain on the defensive, and with the weight of expectation in favor of a third wave of easing, the dollar could be roiled this week.

Euro – The euro advanced from a low at $1.4350 to trade higher on the day reaching $1.4434 on hopes that U.S. – led stimulus would undermine the dollar. Strength for euro has surprised many in light of the political failure to stem the sovereign debt crisis. What does seem to be maintaining the single currency is the recent decision by the ECB to wade back in to the secondary government bond market to purchase Spanish and Italian issues. That move has soothed investors' fears and put a spring in to the step of the euro. In a report issued today by the Bundesbank the German central bank said that the EU's recent decisions that could wear down fiscal and political union neutering the ECB's inflation-fighting ability leaving it unable to exercise tighter monetary policy.

Japanese yen – More disgruntlement emerged from the government and central bank officials over the weekend following Friday's record-high for the yen against the dollar at ¥75.95. Finance Minister Noda said “decisive steps” were necessary and that he was “more concerned about the worsening of the yen's one-sided movements.” Friday's acceleration to a new peak increasingly looks like a human-error or someone closing out a bad bet against the yen. The market remains nervous that the Bank of Japan is on the edge of intervention with one official expressing worry over the medium-term damage to the Japanese economy likely to result from a stronger yen. The dollar rose on Monday to buy ¥76.80.

British pound – The pound's a shade lower against both the euro at 87.40 pence and buys $1.6475 against the dollar on a day void of domestic data and a reprieve for global stocks. Set against recent gains for the Swiss franc in an increasingly risk averse environment, the pound has been buoyant against both the dollar and euro.

Aussie dollar – The Aussie rebounded from earlier weakness as global stock markets advanced with hopes running high for a fresh look at quantitative easing at Friday's Jackson Hole symposium. The unit recently traded at $1.0469 against the dollar and ¥80.14 against the Japanese unit.

Canadian dollar – The response to early conviction over what Fed Chief Bernanke will do and say was to rally support for the Canadian unit on Monday. The unit rose to $1.0168 before equity indices pared an early sizable gain. The Canadian recently eased to $1.0137 U.S. cents.