On Friday, the Australian dollar got hammered on speculation that former Treasury Secretary, Larry Summers, would be appointed by US President Barack Obama as the next chairman of the Federal Reserve Board, replacing Ben Bernanke whose tenure expires in January 2014.
Now Summers has withdrawn his name from consideration for Federal Reserve chairman after reportedly facing stiff opposition from some Democrats, including members of the Senate Banking Committee.
Markets have so far reacted positively to the news of Summers’ withdrawal from nomination. For example, the Australian dollar was this morning trading at 93.33 US cents, up nearly one cent from Friday’s close of 92.38 US cents.
Summers was expected to taper the US’ quantitative easing (QE) program more aggressively than Professor Janet Yellen, the other favourite for the Fed Chair. He was also viewed as more authoritarian than Bernanke or Yellen would have been, and was expected to be more pro-tax hikes (although the Fed obviously doesn’t have jurisdiction over fiscal policy).
Put simply, with Summers now out of the picture, there is the prospect that interest rates will remain lower for longer, and Fed QE stimulus will remain higher. This would be good for risk assets, which pleases the market, although it also risks increasing global imbalances.
Moreover, the removal of Summers should also support the Australian dollar by maintaining the interest rate differential between the two nations.
