The U.S. dollar was trading slightly lower mid-morning in Sydney on Wednesday after being boosted overnight by Federal Reserve chairman Ben Bernanke signalling an end to the central bank’s aggressive rate-cutting policy. At 10:30 a.m. (0030 GMT) the dollar was at 105.04 yen, down from 105.10 yen in late trading in New York on Tuesday. The euro was at $1.5451 from $1.5446 in New York. The dollar got a bounce on Tuesday after Bernanke said inflation was a primary concern and acknowledged that the Fed’s aggressive rate-cutting campaign had contributed to a lower U.S. dollar.

That in turn has helped to push up the prices for imported goods flowing into the U.S., such as oil, and fuelled a rise in consumer prices.

Bernanke called that development ‘unwelcome’. He said the Fed is ‘attentive to the implications of changes in the value of the dollar for inflation and inflation expectations’.

The euro/dollar rate, which had risen to almost $1.5630 in early London trading, dropped below $1.5450 after Bernanke’s dollar supportive remarks.

‘In short, the Fed doesn’t want to see a weaker U.S. dollar because it would boost inflation and is putting a greater weight on the currency in setting interest rates,’ said NAB Capital Markets head of currency strategy John Kyriakopoulos.

He said Bernanke’s comments suggest another interest rate cut by the Fed is unlikely unless the economy falls over a cliff, which isn’t the central bank’s forecast.

‘Tonight’s U.S. economic reports on ADP employment and the ISM for services would need to be shockingly weak to unsettle the newfound support for the U.S. dollar,’ said Kyriakopoulos.

John Noonan, a senior foreign exchange analyst at Thomson IFR, said Bernanke’s comments were well timed as the dollar was looking vulnerable as fears about the health of the U.S. financial sector were back to mid-March levels when the greenback hit all-time or multi-year lows against a number of currencies.

Noonan said a weaker U.S. dollar is no longer welcome by U.S. authorities as the focus shifts from growth promotion to inflation fighting, though what the Fed and U.S. Treasury can actually do about a falling U.S. dollar is not obvious and a subject of debate.

‘One thing is certain though and that is the Bernanke jawboning about the U.S. dollar resulted in putting the U.S. dollar into a strong technical position to make further, sustained gains,’ he said.

Posted by Zoov on 04 Jun 2008 03:12 am
Filed Under: Business |