Bernanke and the Dollar

Dollar Rises to Two-Week High Versus Euro on Bernanke's Remarks

June 3 (Bloomberg) -- The dollar rose to a two-week high against the euro and increased versus the yen as Federal Reserve Chairman Ben S. Bernanke said the central bank is ``attentive'' to the implications of the U.S. currency's decline.

Traders interpreted the remarks as a sign that policy makers are done cutting interest rates as the weakened dollar causes the price of imports including crude oil to rise, sparking inflation. Oil and gold dropped today. The U.S. currency has tumbled 9 percent against the euro and the yen since the Fed began cutting the target lending rate on Sept. 18.

``It could be a turning point for the dollar,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodial bank, with more than $20 trillion in assets under administration. ``It's very unusual for a sitting Fed chairman to talk about the dollar explicitly.''

The U.S. currency rose 0.5 percent to $1.5458 per euro at 4:05 p.m. in New York, from $1.5537 yesterday. It touched $1.5411, the strongest level since May 14. The dollar increased 0.7 percent to 105.13 yen, from 104.43. The euro was up 0.2 percent to 162.53 yen, from 162.26.

Sweden's krona gained the most in almost four months versus the euro after the central bank said the country's lenders have weathered the credit-market crisis. The currency rose 0.5 percent to 9.3326 per euro after Riksbank Governor Stefan Ingves said Sweden's banks have ``so far succeeded in resisting the financial turmoil relatively well.''

Fed on Currencies

Bernanke raised his biggest concerns yet about the effects of the weakened dollar via satellite to the International Monetary Conference in Barcelona, Spain. The Fed is working with the U.S. Treasury Department to ``carefully monitor developments in foreign exchange markets'' and is aware of the effect of the dollar's decline on inflation and price expectations, he said.

U.S. import prices rose 15.4 percent in April, the biggest increase since the Labor Department's index began in 1982. Crude oil reached a record $135.09 a barrel on May 22.

When asked for their opinions on the dollar, Bernanke and other Fed officials tend to defer to the Treasury, which is responsible for currency policy. The Fed chief meets weekly with Treasury Secretary Henry Paulson, who yesterday repeated his backing for a strong U.S. currency.

``Bernanke is now saying that he also has an interest in the level of the currency,'' said Torsten Slok, a U.S. economist in New York at Deutsche Bank AG, the biggest currency trader. ``If the last bastion of dollar weakness -- U.S. indifference -- is falling away, the dollar may rally.''

ECB's Trichet

European Central Bank President Jean-Claude Trichet also spoke at the Barcelona event, reiterating that ``monetary policy stays firmly focused on delivering price stability.''

The dollar has increased 3.5 percent since touching the all-time low of $1.6019 per euro on April 22, as the Fed signaled it will stop cutting interest rates. Since the central bank's decision in mid-March to arrange $39 billion of financing to facilitate the takeover of Bear Stearns Cos. by JPMorgan Chase & Co., the yield on the 10-year U.S. Treasury note has increased 0.50 percentage point to 3.90 percent, making dollar- denominated assets more attractive.

Futures on the Chicago Board of Trade show a 62 percent chance the Fed will raise the 2 percent target rate for overnight lending between banks by at least a quarter-percentage point in December, compared with 50 percent odds a month ago. The central bank has made seven reductions totaling 3.25 percentage points since September.

`New Reality'

``The threshold for further Fed easing is now higher,'' Jens Nordvig, a strategist at Goldman Sachs Group Inc. in New York, wrote in a research note today. ``We would not be surprised to see the dollar trade stronger versus major currencies in coming weeks as the market fully incorporates this potentially important new reality.''

The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six major trading partners, increased for a second day, touching 73.501, the highest since May 15.

The dollar's gains against the euro may erode before the ECB's meeting on June 5 and the U.S. Labor Department's payroll report the next day, according to Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.

`Ahead of Itself'

``We are suspicious that the sharp dollar rally today is getting ahead of itself,'' Chandler wrote in a research note today. ``It's all the more true given that the two key sources of event risk still lie ahead.''

The ECB will keep its main refinancing rate at a six-year high of 4 percent, according to all 59 economists surveyed by Bloomberg News. The U.S. probably lost 60,000 jobs in May, after a decrease of 20,000 the prior month, according to the median forecast of 78 economists in a separate Bloomberg survey.

The dollar will strengthen to $1.49 against the euro and 105 yen by the end of the year, according to the median forecast of 44 economists surveyed by Bloomberg News.