Dollar Falls as Bernanke Says Fed to Respond If Stimulus Needed

Dollar, Franc Weaken on China Growth, Fed Minutes
The dollar weakened 0.5 percent against the euro. Photographer: Chris Ratcliffe/Bloomberg

The dollar weakened against all its most-traded counterparts as Federal Reserve Chairman Ben S. Bernanke said policy makers will provide economic stimulus if needed and investor demand for higher-yielding assets increased.

The greenback fell the most in six months versus the euro as Bernanke said central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. The Australian and New Zealand dollars led earlier gains against the currency after China’s economic growth exceeded analysts’ estimates. The euro advanced as Italian and Spanish bonds rose for a second day.

“The biggest sound bite from Bernanke was that he acknowledged the potential for an additional monetary stimulus package is out there if necessary and that really caught the market’s ear,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “It helps the risk-on trade.”

The dollar weakened 1.4 percent against the euro to $1.4167 at 5:02 p.m. in New York, its biggest drop since Jan. 13. It reached $1.3837 yesterday, the strongest level since March 11.

The Standard & Poor’s 500 Index rose as much as 1.4 percent percent and the yield on 10-year Treasuries increased as much as eight basis points to 2.96 percent.

Swiss Strength

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, including the euro, yen and pound, slid for a second day, shedding as much as 1.1 percent.

Switzerland’s franc, which benefits in times of turmoil from the nation’s role as a stable, neutral financial center, strengthened to a record against the dollar, appreciating 1.5 percent to a record 81.78 centimes.

Bernanke testified before the House Financial Services Committee as a fiscal-policy deadlock threatens to reverse the decline in borrowing costs he gained through record stimulus.

The central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling, he said.

Fed policy makers disagreed about whether additional monetary stimulus will be needed, according to minutes of their meeting last month released yesterday. Bernanke re-affirmed plans by the Fed to sustain record stimulus and to hold its benchmark interest rate near zero for an “extended period.”

Euro Relief

The 17-nation euro advanced 0.2 percent against a basket of nine major trading partners, according to Bloomberg Correlation-Weighted Indexes. It is the first gain in four days.

Italian bonds rallied for a second day, pushing the yield on the 10-year security down 12 basis points, and easing concern that the region’s debt crisis may spread beyond Greece, Ireland and Portugal. Italy should meet this year’s budget goal and adherence to fiscal targets would be consistent with stabilizing the nation’s credit rating, Fitch Ratings said.

“Bernanke’s comments may take some of the focus off what markets have been trading on, which have been largely linked to European news,” said Aroop Chatterjee, a currency strategist at Barclays Plc in New York. “We’ve seen a reduction of some of the idiosyncratic risks related to Europe but some pretty crucial events loom ahead.”

Reverse Measure

The seven-day relative strength index for the euro versus the dollar rose to 40.75 after two days below the 30 level, the longest streak since May 16. Readings below 30 indicate an asset may have declined too quickly and may be due for a reversal.

China’s gross domestic product increased 9.5 percent in the second quarter from a year earlier, the statistics bureau said in Beijing. Industrial output advanced 15.1 percent in June, the most since May 2010.

Australia’s dollar rose for the first time in four days, strengthening 1.5 percent to $1.0758, and gained 1.2 percent to 84.82 yen. China is the nation’s largest trading partner, consuming Australia’s raw material exports.

The Thomson Reuters/Jefferies CRB Index of 19 Raw Materials advanced 1.4 percent and gold rose to a record in London and New York.

New Zealand’s currency advanced 2.4 percent to 83.74 U.S. cents and gained against all its major counterparts after a report. China is the No. 1 destination for the nation’s exports.

Yen Falls

The yen weakened after Japanese Finance Minister Yoshihiko Noda said its moves have been “a bit one-sided.”

The yen dropped 1 percent to 111.86 per euro. Japan’s currency added 0.3 percent to 78.98 per dollar after gaining 2.5 percent in the previous three days. It appreciated to 78.50 earlier today, the most since policy makers jointly intervened in foreign-exchange markets in March.

“We were surprised at yen’s gain last night,” said C.J. Gavsie, managing director for foreign exchange trading at Bank of Montreal in Toronto. “People we’re talking to in the market said it was due to some very poor liquidity.”

Japanese Chief Cabinet Secretary Yukio Edano echoed Noda’s comments, saying rapid foreign-exchange moves were not “desirable.” Group of Seven nations jointly sold Japan’s currency on March 18 after the yen surged to a postwar record of 76.25 per dollar the previous day, threatening the nation’s recovery from the March 11 earthquake and tsunami.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE