The greenback struggled against the yen and euro at the start of the week amid a dearth of fresh US economic news. The currency also tumbled to a new all-time low against the Swiss franc. Speculation that the Fed may step in to cut interest rates before the next policy meeting at the end of the month dragged the dollar lower. The market is now fully pricing in a 50-basis point rate cut after last week’s dovish tone from Chairman Bernanke, in which he said that the FOMC would adopt “substantive additional action” to prop the economy.

US economic reports and Fed Chairman Bernanke’s Congressional testimony will drive the markets this week. Retail sales will be released on Tuesday, and are expected to report disappointing results from December – with a flat monthly reading in both the headline and ex-autos, down from 1.2% and 1.8%, respectively. Also due out tomorrow are the December PPI figures, both headline and core seen falling to 0.2% m/m. Traders will closely look at the rest of this week’s data – consisting of industrial production, CPI, housing starts, building permits, Fed Beige Book, Philadelphia Fed index, and the University of Michigan consumer sentiment, for further indication of whether a US economic recession is forthcoming.

Fed Chairman Bernanke testifies before Congress on Thursday and will be questioned about his comments last week, which signaled aggressive rate cuts were imminent. Given the current outlook for inflation and growth, the Fed still runs the risk of sparking inflationary pressure by easing interest rates to jumpstart the faltering economy. With the FOMC stuck between a rock and a hard place, it remains to be seen how much ammunition the Fed has to ease policy in light of further increases in oil and commodity prices.

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