Wednesday June 4, 2008 - 20:45:21 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar up broadly as Bernanke cements Fed pause view
(Recasts, updates prices, changes byline)
* Dollar rises as Bernanke warns on inflation expectations
* Surprisingly upbeat economic data also lifts dollar
* Bernanke's remarks and data bolster Fed pause views
By Lucia Mutikani
NEW YORK, June 4 (Reuters) - The dollar rose on Wednesday
after Federal Reserve chief Ben Bernanke highlighted growing
inflation expectations as a "significant concern," yet another
sign the central bank was likely done cutting interest rates.
Perceptions that the Fed could even tighten monetary policy
later this year, after an aggressive rate-cutting campaign,
were also hardened by unexpectedly strong economic data that
suggested the United States would probably avoid a recession.
Steady or higher interest rates would help stem the erosion
of the dollar's appeal to global investors.
"Bernanke's comments suggested that he's going to be far
less accommodative when it comes to interest rates," said John
McCarthy, director of foreign exchange at ING Capital Markets
in New York.
"This is dollar-supportive because that means that interest
rate differentials shouldn't fall as much."
The New York Board of Trade's dollar index, which tracks
the dollar's performance against a basket of currencies,
climbed to a session high of 73.517 .DXY, up 0.2 percent on
Bernanke's latest remarks came on the heels of a rare
warning on Tuesday that a weak dollar posed a risk of
"Interest rates are on hold in the United States, but there
is a risk they could move higher depending upon incoming data,"
said Michael Woolfolk, senior currency strategist at Bank of
New York Mellon.
"Bernanke and the Fed are concerned about rising inflation
expectations, and once the financial markets crisis subsides
further, they will be in a position to raise interest rates
along with the European Central Bank."
CAUTION AHEAD OF ECB MEETING
Aggressive interest rate cuts by the Fed, aimed at heading
off a recession, have undermined the dollar by reducing the
appeal of assets denominated in the currency due to lower
yields. Since September, the federal funds rate target has been
slashed by 3.25 percentage points to 2 percent.
The euro dipped 0.1 percent to $1.5431 <EUR=>, but caution
ahead of Thursday's ECB policy meeting saw traders reluctant to
aggressively sell the European single currency.
The ECB is expected to leave its main lending rate
unchanged at 4 percent, but President Jean-Claude Trichet's
comments will be closely watched for indications of when the
central bank might start moving on interest rates.
"Trichet has sounded very hawkish, so has (ECB Governing
Council member Axel) Weber, recently. If they signal an
imminent rate rise, which is not completely out of the
question, that would be very favorable for the euro," said
"That said, data out of Europe has disappointed, including
the UK. The dollar is positioned to rally further, there is no
question, once we get past the event risk of the two central
bank meetings tomorrow."
The Bank of England is also due to meet on interest rates
on Thursday. It is widely expected to keep rates steady at 5
percent. On Wednesday, sterling traded down 0.5 percent at
Against the yen <JPY=>, the dollar rose 0.1 percent to
105.23 yen, brushing off a fall in U.S. stocks on a combination
of fears of more credit-related losses and worries there would
be no further cuts from the Fed.
Concerns about the credit crisis remained in the forefront
as Moody's Investors Service said it would likely cut the
credit ratings of the bond insurance arms of MBIA Inc (MBI.N: Quote, Profile, Research)
and Ambac Financial Group (ABK.N: Quote, Profile, Research).
"We are still in a panic mode with these financials," said
Joe Francomano, vice president for foreign exchange at Erste
Bank in New York. "We are still in a credit crunch, but the
reason we're not as down as before is that the Fed is more
Wednesday's economic data showed the service sector and
private employment posting surprising gains in May. For
details, see [ID:nN04466345]
(Additional reporting by Gertrude Chavez Dreyfuss; Editing by
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