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Tuesday June 5, 2007 - 20:45:26 GMT
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FOREX NEWS-Dollar falls, hit by Bernanke remarks on economy

FOREX-Dollar falls, hit by Bernanke remarks on economy
Tue Jun 5, 2007 4:26 PM ET

(Updates prices, adds comment)

By Steven C. Johnson

NEW YORK, June 5 (Reuters) - The dollar fell against the euro and yen on Tuesday, dipping below key technical levels after Federal Reserve Chairman Ben Bernanke said the ailing U.S. housing sector may remain a drag on economic growth.

A report showing U.S. services sector growth hit its highest level in more than a year helped the dollar recover somewhat by suggesting there's still too much juice in the economy to justify lower interest rates.

But Bernanke's warning on housing as well as market expectations of higher euro zone interest rates and swifter growth in other major economies kept investors gravitating away from the greenback.

In remarks prepared for a conference in Cape Town, South Africa, Bernanke warned that problems in the housing market may drag on U.S. growth for "somewhat longer" than expected.

"He could have been more upbeat given the recent run of strong U.S. data, but his acknowledgment that housing is likely to be a more protracted drag really caught the market's attention," said Sophia Drossos, senior currency strategist at Morgan Stanley in New York.

Midafternoon, the euro was 0.2 percent firmer at $1.3520 . Earlier, it hit a three-week high at $1.3550. The dollar fell 0.3 percent to 121.35 yen and 0.5 percent to 1.2180 Swiss francs .

A rise in the Institute for Supply Management's services index to its highest level since April 2006 provided only brief respite for the greenback.

But it did chip away at market expectations of a Fed rate cut this year, pushing short-term Treasury yields higher and sapping enthusiasm among equities investors. Investors in interest rate futures practically wiped out any chance of a Fed rate cut this year.

Wall Street firms have as a result been changing their calls on the Fed's next move. Goldman Sachs said Tuesday it now expects the Fed to hold rates at 5.25 percent this year and next, reversing an earlier call of 75 basis points of cuts in 2007.

Merrill Lynch and UBS on Monday also reversed calls for a Fed cut this year.

Drossos chalked up the dollar's inability to rise on all of this to a broader outlook that sees U.S. growth continuing to lag that in other major economies, including the 13-country euro zone.

The European Central Bank is expected to lift interest rates to 4 percent at a meeting on Wednesday, and some are gearing up for officials to signal future increases as well.

"The dollar of late has been unresponsive to some good economic news. We've seen the bond market and equity market responding, but the currency market seems somewhat confused," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut. "It's partly that strong U.S. data is being nullified by strong euro zone data."

He said sharper moves are being seen on cross rates such as euro/yen, which earlier hit a new record high of 164.62 , according to electronic platform EBS.

Expectations for future rate hikes also boosted demand for the already high-yielding Australian dollar , which hit a 17-year high against the U.S. currency. The New Zealand dollar rose to its highest level against the greenback since it was floated in 1985.

The Reserve Bank of Australia will make a rate decision on Wednesday and the Bank of England and the Reserve Bank of New Zealand will issue policy statements on Thursday. All are seen holding rates steady, but markets expect they will maintain a bias toward future hikes.

© 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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