Dollar Falls as Bernanke Unsure When Monetary Stimulus to Unwind

Wednesday, 27 Apr 2011 04:02 PM

 

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The dollar dropped to a 16-month low against the euro after Fed Chairman Ben Bernanke said in his first press conference after a policy decision that he’s unsure when the central bank will unwind stimulus.

The yen fell against all of its major counterparts as investors sought higher-yielding assets and Standard & Poor’s cut Japan’s debt outlook to “negative.” The greenback slid for a seventh day versus the euro as Bernanke said the central bank will likely continue reinvesting maturing debt after its $600 billion bond-buying program expires in June.

“His language does not provide enough to change the dollar’s downtrend,” said Jessica Hoversen, a New York-based analyst at the futures broker MF Global Holdings Ltd. “The Fed believes that accommodative policy is still necessary, long-run inflation expectations remain stable and growth fragile.”

The dollar depreciated 1 percent to $1.4784 versus the euro at 3:44 p.m. in New York, from $1.4644 yesterday, after touching $1.4784, the weakest level since December 2009. The U.S. currency pared its gain versus the yen, advancing 0.7 percent to 82.09 yen after earlier rising 1.5 percent. The euro advanced 1.6 percent to 121.33 yen, from 119.42.

Bernanke told reporters that the end of the Fed’s bond-buying program in June probably won’t have a “significant” effect on financial markets or the economy and that the central bank will likely continue reinvesting maturing debt after June.

‘Staying to Script’

“Bernanke is very much staying to script,” Boris Schlossberg, director of research at online currency trader GFT Forex in New York, said via e-mail. “The longer-term implications of the first press conference are that the Fed will remain stationary for the time being while the rest of the G-10 with the exception of Japan is moving toward a more tightening bias.”

IntercontinentalExchange’s Dollar Index, which tracks the greenback against the currencies of six major trading partners including the euro, slid 0.4 percent to 73.573 after touching 73.493, the lowest level in more than two years.

The central bank held its target rate for overnight lending between banks at zero to 0.25 percent, as forecast by all of the 84 economists in a Bloomberg News survey. The benchmark has stayed at that level since December 2008.

Fed policies will lead to a “strong and stable” dollar, according to Bernanke, who said the U.S. currency still has “high standing” in the world.

Bernanke on Dollar

“Ultimately the best thing we can do to create strong fundamentals for the dollar in the medium term is first keep inflation low, which maintains the buying power of the dollar, and second create a stronger economy,” Bernanke said.

The U.S. economy grew at a 2 percent annual pace in the first quarter after a 3.1 percent rate of expansion in the last three months of 2010, according to the median forecast of 80 economists in a Bloomberg News survey before tomorrow’s report from the Commerce Department.

South Korea’s won appreciated as much as 0.9 percent to $1,078.45 versus the dollar in its biggest intraday gain in a week. A Bank of Korea report showed gross domestic product increased 1.4 percent in the first quarter after a 0.5 percent gain in the last three months of 2010.

The outlook on Japan’s AA-local-currency government debt rating, the fourth-highest grade, was lowered to “negative” from “stable,” S&P said today, citing costs for rebuilding after the nation’s record earthquake on March 11.

BOJ Stimulus

Bank of Japan Governor Masaaki Shirakawa signaled in an interview on April 25 that the central bank may expand a lending program aimed at bolstering growth industries.

The yen has weakened 5.2 percent over the past month in the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The dollar has declined 4 percent.

The euro remained higher against the greenback after a report showed European industrial orders gained for a fifth consecutive month in February.

Aiming to keep annual inflation below 2 percent, the European Central Bank raised its main refinancing rate this month by a quarter-percentage point to 1.25 percent. It left the door open for more increases even as nations such as Greece, Ireland and Portugal struggle to contain sovereign-debt turmoil.

Greek two-year yields rose above 25 percent for the first time, while 10-year bond yields advanced to euro-era highs for a ninth consecutive day. Greece isn’t considering restructuring, said an e-mail message from a Finance Ministry press officer, who cited government policy in asking not to be identified.

© Copyright 2014 Bloomberg News. All rights reserved.

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