By Eric Burroughs
TOKYO, June 4 (Reuters) - The dollar drifted on Wednesday,
holding big gains against the euro and other major currencies
racked up the previous day when Federal Reserve Chairman Ben
Bernanke issued an explicit warning about the inflationary
threat from a weak U.S. currency.
Bernanke said the weak dollar was adding to price pressures
and that the Fed along with the U.S. Treasury were carefully
monitoring currency markets, suggesting greater concern in
Washington and the potential for dollar-buying intervention.
[]
The Fed rarely comments on the dollar because currency
policy is up to the Treasury.
"It was extraordinary for the Fed to make a specific comment
on the dollar, even in the context of inflationary risks," said
Toshihiko Sakai, a manager of forex trading at Mitsubishi UFJ
Trust Bank.
The dollar's tumble to record lows this year, driven by the
Fed's aggressive rate cuts, has caused a vicious circle by
adding fuel to the surge in oil and commodity prices and stoking
inflation pressures around the world.
Analysts said Bernanke's unexpected reference to the weaker
dollar could put a floor under the U.S. currency, but it may
also tempt some investors to see if officials in Washington will
back their words with action.
The Fed chief's comments also suggested the central bank is
unlikely to cut interest rates further from 2 percent, and
investors are looking for the next move to be a rate increase
later in the year.
Masafumi Yamamoto, head of FX strategy for Japan at Royal
Bank of Scotland, said the key message from Bernanke's speech to
other central bankers in Spain is that the Fed's focus has
shifted to containing inflation fears.
"From here, the next policy move will be a rate hike, not a
cut. But it does not mean an immediate action by the Fed,"
Yamamoto said.
While U.S. Treasury Secretary Henry Paulson has repeatedly
said a stronger dollar in is the country's interests, those
words have largely fallen on deaf ears because Treasury
secretaries have stuck to that refrain even as the U.S. currency
slid.
But Bernanke struck a chord, especially by saying the U.S.
central bank and Treasury were watching currency markets in what
appeared to be in a reference to the most recent statement by
Group of Seven financial leaders.
The G7 caught investors off guard in April by saying
officials were monitoring exchange markets closely and will
cooperate as appropriate, which was seen as a show of support
for the dollar. []
The dollar edged up to 105.15 yen <JPY=> from 105.07 yen in
late U.S. trade after having moved back near a three-month high
struck last week.
The euro barely budged at $1.5446 <EUR=> after having slid
as low as $1.5410, tumbling 1.4 percent from Tuesday's peak. The
single currency has retreated from the all-time peak of $1.6020
reached in April in the weeks following the G7 statement.
The dollar's trade-weighted index -- a gauge of its
performance against six major currencies -- was flat at 73.325
<.DXY> after surging as much as 1.3 percent from Tuesday's lows.
The dollar index has clawed back 3.7 percent from a record low
hit in March.
The Australian dollar edged up 0.4 percent to $0.9563 after
data showing Australia's economy expanded at a robust 3.6
percent annual rate in the first quarter, keeping alive
expectations for higher interest rates. []
Analysts were abuzz over Bernanke's remarks, which
overshadowed the latest worries about the U.S. financial sector
after reports Lehman Brothers <LEH.N> may need to raise capital.
"We take this as a meaningful shift in rhetoric," said
currency strategists at Morgan Stanley in a note to clients.
"The Fed would not have made these comments without the
support of the Treasury, given that the Treasury has the
responsibility for exchange rate policy. In that regard, we can
view this as a coordinated signal from U.S. monetary
authorities," they said.
But Morgan Stanley said the risk of dollar-buying
intervention was low for the time being, though it would be
possible with all the G7 powers seeming to be more coordinated
in their views on the dangers of a sliding U.S. currency.
Some analysts said Bernanke's comments will reverberate in
markets for a while and showed that the United States no longer
had a policy of "benign neglect" on the dollar, tolerating its
weakness as long as it helps the economy through export growth.
(Additional reporting by Satomi Noguchi)
