Dollar Drops as Bernanke Makes Case for More Monetary Stimulus

The Dollar Index (DXY) fell for a second week as Federal Reserve Chairman Ben S. Bernanke defended his unprecedented actions and made the case for further monetary stimulus to counter unemployment of more than 8 percent.

The euro rose versus the greenback for a third week, the longest stretch since March, as Bernanke said at an annual forum in Jackson Hole, Wyoming, that joblessness was a “grave concern” and that further bond purchases under quantitative easing shouldn’t be ruled out. The dollar declined versus the yen as reports showed U.S. business activity expanded more slowly this month. A Labor Department report Sept. 7 is forecast to show the U.S. added fewer jobs in August.

“Earlier in the week, there were more expectations that there could be further hinting at QE3 in September,” David Mann, regional head of research for the Americas at Standard Chartered in New York, said yesterday in a telephone interview. “By the time we got to the speech today, expectations were swinging back more in line with what we ended up with. The belief that further stimulus can help is still keeping the quantitative-easing view alive.”

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners including the euro and the yen, fell 0.5 percent to 81.204 this week. It dropped to more than a three-month low yesterday, touching to 80.964.

The dollar fell 0.5 percent to $1.2579 per euro this week in New York, after losing 1.4 percent in the five days ended Aug. 24. The yen was little changed at 98.46 per euro. The Japanese currency appreciated 0.5 percent to 78.28 to the dollar.

Net Shorts

The Canadian dollar was the biggest winner among its 16 most-traded peers this week, climbing 0.6 percent to 98.63 U.S. cents. New Zealand’s dollar was the worst performer, declining 1 percent to 80.31 U.S. cents.

Futures traders decreased bets the euro will fall against the dollar, Commodity Futures Trading Commission data showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 101,561 on Aug. 28, compared with 123,932 a week earlier. Net shorts reached a record 214,418 on June 8.

The greenback fell 1.5 percent this month, according to the Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro gained 0.9 percent, while Norway’s krone was the best performer, rising 3 percent.

Aussie, Kiwi

The Australian dollar touched its lowest point against its U.S. peer since July 25 as China’s Shanghai Composite Index (SHCOMP) slipped on Aug. 30 to its lowest level since February 2009. China is Australia’s largest export market.

The so-called Aussie lost 1.3 percent to A$1.2183 per euro. The currency dropped 0.8 percent to $1.0322 after decreasing to $1.0277, its lowest level in August.

New Zealand’s dollar also fell to its lowest point in August versus the greenback, touching 79.70 U.S. cents on Aug. 30, before trading down 1 percent at 80.34. The so-called kiwi decreased 1.4 percent to 62.93 yen.

“We have more and more signs coming out of Asia, especially China, that growth may not be that strong,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said yesterday in a telephone interview. “This raises some concerns over where things are going. The concern now is that you need better signs of growth.”

Norwegian Krone

Norway’s krone was the week’s second-biggest gainer against the euro even after Norges Bank Deputy Governor Jan F. Qvigstad warned speculators on Aug. 30 against testing the central bank’s resolve following the currency’s appreciation to a nine-year high in August.

“They can talk about whatever they want, but unless they’re acting or doing something significant to change the trajectory of it, it’s really hard to see why the markets would listen a vice finance minister,” Andrew Busch, a global currency strategist at Bank of Montreal (BMO) in Chicago, said in an Aug. 30 telephone interview.

The Norwegian currency advanced against most of its major peers on Aug. 28 amid speculation the Oslo-based Norges Bank, which has cut its main rate by 75 basis points, or 0.75 percentage point, since December, would leave its key policy rate at 1.50 percent, according to the median estimate in a Bloomberg survey. The bank left the rate unchanged.

The krone gained 0.6 percent to 5.7979 per dollar after appreciating to 5.7683 yesterday, the strongest level since May 4.

‘Nontraditional Policies’

Bernanke told central bankers and economists at the Kansas City Fed’s annual economics symposium that “nontraditional policies” shouldn’t be ruled out if economic conditions warrant them. He emphasized that a new round of bond purchases is an option, and repeated the Federal Open Market Committee’s last statement that the central bank “will provide additional policy accommodation as needed” to spur growth.

The Fed chief’s speech came two weeks before the next meeting of the policy-setting Federal Open Market Committee. Many policy makers at the committee’s previous meeting said additional stimulus probably will be needed soon unless the economy showed a “substantial and sustainable strengthening,” according to minutes of their July 31-Aug. 1 meeting.

The U.S. unemployment rate has stayed at or above 8 percent since February 2009. It was 4.4 percent in October 2006.

U.S. employers added 125,000 jobs in August, fewer than the 163,000-position increase in July, economists in a Bloomberg News survey forecast before the Labor Department reports the data on Sept. 7. The unemployment rate will remain at 8.3 percent, they projected.

Spanish Aid

The euro rose for a third week against the yen amid comments on Aug. 28 from European Union President Herman Van Rompuy that the region’s rescue fund is ready for rapid action to aid Spanish banks. Spain’s Prime Minister Mariano Rajoy said on Aug. 30 that his government would delay deciding whether to seek a sovereign bailout until the aid conditions are clear.

Chinese Premier Wen Jiabao pledged that same day to consider European bond purchases while urging Spain, Italy and Greece to take steps to prevent a worsening of the euro-region’s sovereign-debt crisis.

The European Central Bank’s Governing Council meets on Sept. 6 in Frankfurt and central-bank President Mario Draghi is expected to announce details of the bank’s new bond-buying program, a proposal that has been criticized by Germany’s Bundesbank.

“It’s quite clear at this point that a bond-purchase program will materialize,” Jens Nordvig, managing director of currency research at Nomura Holdings Inc. in New York, said in an Aug. 28 interview on Bloomberg Television’s “Lunch Money” with Sara Eisen. “That is enough to underpin the market for now. It doesn’t mean that the euro crisis has been solved, but it means that global markets can trade better for the time being.”

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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