Dollar tumbles on Bernanke speech, euro rebounds

Reuters
July 13, 2011

The dollar fell against most major currencies on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank could resort to more monetary stimulus if a sluggish U.S. economy weakens further.

That pushed the euro above $1.41, moving it further from the prior session’s four-month low beneath $1.39 and on track for its best day since mid-April.

Surprisingly swift Chinese growth data also helped divert attention, at least temporarily, from a worsening euro zone debt crisis, as Fitch Ratings, which said an ambitious Italian deficit reduction plan would help stabilize its credit rating.

“The comments from Bernanke and Fitch amount to a double whammy for the dollar and a boost for the euro and riskier assets. It’s all positive for risk,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.

The Fed ended its most recent asset-purchase program in June. Traders said that another round of easing would flood the financial system with more money and encourage investors to reach for higher-yielding currencies and assets.

Major U.S. stock indexes rose more than 1 percent and gold hit a record high. The euro was last at $1.4142, up 1.2 percent. It also rose 1.7 percent against the yen.

The high-yielding, commodity-sensitive Australian and New Zealand dollars rose sharply.

Fitch’s remarks eased worries about Italy, which saw its borrowing costs soar this week for fear a default in Greece would hurt European banks and strain other countries’ finances.

Italy is considered especially vulnerable, as it has the euro zone’s second largest debt-to-output ratio, which would become harder to finance with higher borrowing costs.

Still, some analysts said markets remained anxious. European leaders, set to convene an emergency meeting on Friday, have yet to agree on a second Greek bailout.

“I’d call this a short-term respite,” said Firas Askari, head of FX trading at BMO Capital Markets. “If we don’t hear anything substantial from Europe by the weekend, people will be back to shorting the euro next week.”

In the options market, one-month risk reversals were elevated in favor of euro puts — options to sell the currency, with plenty of event risks ahead, including the results of stress tests on euro zone banks due out on Friday.

Reflecting that unease, the yen soared against the euro and hit its highest level against the dollar since Japan’s March earthquake as investors unwound risky trades funded with yen.

The dollar was last at 79.08 yen, not far from its 78.48 four-month low.

That brought warnings from top Japanese officials worried that a strengthening yen will hurt Japan’s fragile economy, raising the possibility that authorities could intervene to weaken the currency.

The dollar also fell to a fresh record trough of 0.8250 Swiss francs after Bernanke’s testimony, and Askari said markets were also on edge about a pending deadline to lift the U.S. debt ceiling.

“We still have not seen the political will in either Europe or the United States to resolve the key issues,” Askari said, which makes positioning for currency investors difficult.

“With currencies, it’s hard to be short everything. The Swiss franc is appreciated, but even Swiss banks won’t be immune from a meltdown in Europe,” he said.