Fed’s Reassurance Boosts Dollar

by
December 6, 2010

By CLARE CONNAGHAN, The Wall Street Journal

LONDON—The dollar rose across the board Monday after Federal Reserve Chairman Ben Bernanke said a double-dip recession in the U.S. isn’t likely, although he didn’t rule out increasing the central bank’s $600 billion bond-buying program to stimulate growth.

In an interview with CBS‘s “60 Minutes” aired Sunday, Mr. Bernanke reassured the market that the Fed will do whatever it takes to prevent the world’s largest economy from slipping back into recession.

The euro traded recently at $1.3267, down from $1.3411 late Friday in New York. The dollar was at 82.75 yen, little changed from 82.71 yen, while the euro was lower at 109.80 yen, from 110.86 yen. The pound was at $1.5684, compared with $1.5771. The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, rose to 79.867 from 79.181 late Friday.

Expectations of Fed bond-buying generally push the dollar lower, as it is a form of monetary easing. For now, though, the support for the economy appears to be outweighing those concerns, helping the dollar to claw back some of the value it lost after disappointing U.S. labor-market data Friday.

“The Fed’s willingness to take further quantitative-easing measures means that the U.S. central bank will continue to take active steps in an effort to prevent the U.S. economy from sliding back into recession,” said currency strategists at Commerzbank in a note to clients.

In the long term, the idea that an extension of the Fed’s asset-purchase program will support the dollar is “likely to be wrong,” as it opens up the possibility of a problem with inflation, Commerzbank said. Still, “today the former interpretation seems to dominate,” it added.

More broadly, market-watchers are still struggling to decide whether the euro or the dollar faces the bigger risks. “The difficulty is, we’ve had comments over the weekend from Bernanke, and obviously softer-than-expected nonfarm payrolls data on Friday. But at the same time we haven’t solved anything euro-zone wise,” said Daragh Maher, a currencies analyst at French bank Credit Agricole in London, referring to ongoing European debt concerns. “There is complete lack of clarity and market participants are not quite sure which way to jump,” he added.

For now the dollar seems to winning, while pressure on the euro appears to building. In European hours Monday, the 16-country currency lost ground against the greenback, yen and the Swiss franc as European finance ministers prepared to gather in Brussels later Monday amid concerns over the European sovereign-debt crisis.

Reports suggest that ministers could discuss whether the €750 billion bailout fund for euro-zone countries should be enlarged to boost confidence in the common currency.

To read more, visit: http://online.wsj.com/article/SB10001424052748704156304576002972166237778.html?mod=googlenews_wsj

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