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Thursday April 3, 2008 - 01:22:34 GMT
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FOREX NEWS-Dollar falls on Bernanke recession remark

Wed Apr 2, 2008 4:11pm EDT

(Recasts; updates prices, adds comment, adds byline)

By Steven C. Johnson

NEW YORK, April 2 (Reuters) - The dollar fell against most currencies on Wednesday after Federal Reserve Chairman Ben Bernanke said the U.S. economy may dip into recession in the first half of 2008, prompting traders to bet the central bank will cut interest rates again.

The Fed chief's comments lifted the euro to $1.5685 <EUR=>, up 0.5 percent on the day, and erased dollar gains against other major European currencies seen during the prior session.

While Bernanke told a Congressional committee that he expects U.S. growth to recover in the second half of the year, his gloomier near-term outlook dulled hopes that the worst of the credit crisis was already over.

"Bernanke provided a gentle reality check with his reminder that interest rates are probably going to be cut again and that the risk of a recession is still here," said Ashraf Laidi, chief market analyst at CMC Markets in New York.

Among the major currencies, the greenback managed to hold gains only against the yen, rising 0.5 percent to 102.35 yen <JPY=>, which traders tied partly to Bernanke's more positive long-term outlook and his assertion that he does not anticipate having to bail out another Wall Street bank.

The Fed orchestrated a dramatic rescue of Bear Stearns in March after the U.S. investment bank warned that it was close to bankruptcy. Bernanke's testimony on Wednesday was his first to Congress since it acted to backstop the bank.

The dollar fell 0.4 percent to 1.0082 Swiss francs <CHF=> while sterling rose 0.6 percent to $1.9870 <GBP=>.

"(Bernanke) is saying the economy seems to be in the midst of a recession and is suggesting the Fed has given itself more leeway to cut rates, which is obviously weighing on the dollar," said Samarjit Shankar, director of global FX strategy at The Bank of New York Mellon in Boston.

The Fed has cut its benchmark interest rate six times since September, bringing it to 2.25 percent from 5.25 percent.

But the European Central Bank has held rates firm at 4 percent to fend off euro zone inflation, which hit a record high in March. Higher rates make a currency more attractive.

Bernanke's remarks came at a time when financial markets have been feeling a bit more optimistic, a sentiment that blossomed on Tuesday when UBS said it took a $19 billion hit on risky U.S. real estate and related assets.

Though the losses were huge, investors interpreted the news to mean the bank had purged its balance sheets of toxic debt.

Lehman Brothers Holdings (LEH.N: Quote, Profile, Research) also inspired confidence by raising $4 billion of capital on Tuesday, quelling speculation that the bank may be in trouble. For details, see [nN01215030]

EURO ZONE BLUES

The dollar's losses against the euro were partly limited by a report that euro zone leaders are expected to raise concerns about what they see as the excessive strength of the euro at a Group of Seven meeting on April 11, according to European Union sources. [ID:nL02196256]

The euro has gained 7.5 percent against the dollar this year alone, topping out at a record high just above $1.59 in mid-March before easing back to its current level. It gained more than 10 percent in 2007.

Beyond that, investors were looking ahead to Friday's U.S. employment report, expected to show the economy shed jobs for a third straight month.

But a report on Wednesday from ADP Employer Services surprised markets by showing the economy added 8,000 private sector jobs in March. Economists polled by Reuters had expected a 48,000 loss.

"It's always risky to put your faith on the ADP data, but it's another positive news for the U.S. so that's keeping bids on the dollar," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. (Additional reporting by Nick Olivari; Editing by Gary Crosse)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

 

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