Tuesday June 10, 2008 - 11:31:05 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar surges on Bernanke inflation comments
* Dollar jumps broadly -- hits three month high vs yen
* Fed chief Bernanke's inflation remarks fuel rate rise
* Paulson declines to rule out dollar intervention
(Changes byline, adds quotes, updates prices)
By Veronica Brown
LONDON, June 10 (Reuters) - The dollar rose broadly, setting
a three-month high against the yen on Tuesday, after Federal
Reserve Chairman Ben Bernanke raised his anti-inflationary
language, stoking expectations for U.S. interest rate rises.
Bernanke said on Monday that the central bank would strongly
resist rising inflation expectations and that the latest surge
in energy prices added to dangers from price pressures.
He also said the risk of a substantial downturn in the U.S.
economy had receded, sparking broad dollar gains and sending
U.S. bond yields soaring. (For details please double click on
Bernanke's remarks came in the wake of last week's
ultra-hawkish words from European Central Bank chairman
Jean-Claude Trichet, signalling a near-term ECB rate hike to
combat soaring euro area inflation.
"It's become clear that dealing with the side effects of
currency volatility is not enough and that central bankers need
to attack the source of the problem - i.e. oil prices," said
Lena Komileva, G7 market economist at Tullett Prebon.
"There's implicit concern about currency levels. I think the
Fed appreciates there's a high risk that if the ECB were to
deliver tightening, as they threatened last week, the
implications for a weak dollar and higher oil prices...would be
ultimately detrimental both for the Fed's credibility and health
of the U.S. economy," she added.
The interest rate futures market is now pricing in almost 70
basis points worth of rises in U.S. rates from the current 2
percent by the end of the year FEDWATCH.
By 1016 GMT, the dollar was up 0.6 percent to 107.01 yen,
having earlier hit its highest in over three months at 107.13
The euro was down 0.9 percent at $1.5497 <EUR=> while the
dollar also gained 0.8 percent against a basket of currencies to
The dollar began to rally on Monday, before Bernanke's
comments, after U.S. Treasury Secretary Henry Paulson declined
to rule out market intervention and New York Fed President
Timothy Geithner said the central bank was paying close
attention to the dollar.
Bernanke shocked markets last week by saying a weaker dollar
was adding to inflation risks -- a rare departure from normal
policy of not commenting on the dollar -- which began to raise
speculation about intervention.
Bernanke was effectively eclipsed by Trichet's explicit
comments on euro area interest rates, but came back to the fore
again this week, showing that top policymakers are trying to
limit the inflationary impact from oil rising to nearly $140 a
barrel ahead of this weekend's G7 meeting in Japan.
"With currency-supportive comments by the world's most
important central bank governors coming in quick succession,
there is a suspicion that policymakers are co-ordinating their
verbal rhetoric to anchor inflation expectations without
destabilising their own currencies," UBS said in a note to
Highlighting the sudden shift in expectations on the Fed
policy outlook, the two-year U.S. Treasury yield <US2YT=RR>
soared as much as 25 basis points on Tuesday to a high of 2.966
percent -- nearly a percentage point above the Fed funds rate of
The euro shot higher last week after Trichet said a number
of policymakers wanted higher rates and an increase from the
current 4.0 percent was possible next month. He repeated the
message on Monday. [ID:nL09739154]
(Reporting by Veronica Brown; Editing by Ian Jones)
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