(Updates prices, adds comment)
* Bernanke warning on weak currency impact lifts dollar
* Bernanke comment suggests Fed not likely to cut rates
* Rise in U.S. factory orders also supports dollar
By Gertrude Chavez-Dreyfuss
NEW YORK, June 3 (Reuters) - The dollar advanced broadly on
Tuesday after Federal Reserve Chairman Ben Bernanke warned
about the inflationary impact of a weak currency, suggesting
the central bank is not likely to cut interest rates further
this year.
In a speech before the International Monetary Conference
Central Bankers' Panel in Barcelona, Bernanke said the Fed is
carefully monitoring developments in the currency market.
"We are attentive to the implications of changes in the
value of the dollar for inflation and inflation expectations
and will continue to formulate policy to guard against risks to
both parts of our dual mandate," he said, referring to the
Fed's twins goal of ensuring sustainable growth and low
inflation.
"This is a major shift for the Federal Reserve towards the
U.S. dollar as Chairman Bernanke specifically mentions the
importance of the currency for the Fed," said Andy Busch,
global currency strategist at BMO Capital Markets in Chicago.
The remarks likely signal that the policy-setting Federal
Open Market Committee is concerned about the impact of a weak
currency on inflation, "and thus the likely reluctance of the
interest rate-setting body to lower interest rates further,"
Busch said.
"And perhaps signals that rates are poised to be raised in
the future due to inflation," he added.
The interest rate futures market has priced in a 98 percent
chance the Fed will hold interest rates at 2.0 percent at this
month's meeting.
The euro <EUR=> fell to a nearly three-week low versus the
dollar at $1.5411, after trading higher earlier. By midday
trading, it was at $1.5452, still down 0.6 percent on the day.
The dollar index rose half a percent to 73.297 <.DXY>, the
highest since May 14. Against the yen <JPY=>, the dollar rose
0.7 percent to 105.27 yen.
Bernanke's remarks also indicated to many analysts that the
U.S. government's long-standing tolerance for a weaker dollar
because of its positive impact on economic growth is over.
"There is less of a sense of U.S. benign neglect, for the
dollar decline is plainly no longer viewed as benign," said
Alan Ruskin, chief international strategist at RBS Global
Banking and Markets in Greenwich, Connecticut.
"It is a clear suggestion that the Fed has shifted from
viewing dollar weakness as helpful for growth to a point where
the negatives associated with inflation have become more
important," he added.
Also on Tuesday, the dollar garnered support from data
showing a surprise rise in U.S. factory orders for April. New
orders at U.S. factories rose by a sharper-than-expected 1.1
percent in April as strong demand for quickly used nondurable
goods offset a dip in orders for costly durable goods. For
report, see [].
Both Bernanke's speech and the U.S. data seem to have
outweighed concerns about problems in the banking sector, a
factor that pressured the dollar on Monday and earlier in the
session.
On Tuesday, The Wall Street Journal reported that U.S.
investment bank Lehman Brothers <LEH.N> may raise up to $4
billion in new capital, suggesting the firm could post its
first quarterly loss since going public. For more details see
[].
The news had compounded the market's risk aversion, which
reappeared on Monday after Standard & Poor's cut its credit
ratings on Lehman, Merrill Lynch <MER.N> and Morgan Stanley
<MS.N> and said its outlooks on the large U.S. financial
institutions were predominantly negative. For more details see
[].
The Lehman news fueled initial selling in the dollar. A
source familiar with the situation later told Reuters that
Lehman has no need to raise capital and said capital-raising is
just one of several options Lehman is considering. That helped
boost U.S. equities, along with a drop in oil prices <CLc1>.
(Editing by Leslie Adler)
