The dollar rallied against the euro and yen after comments from Federal Reserve Chairman Ben S. Bernanke reduced speculation the central bank will provide more monetary stimulus.
The dollar erased earlier losses after Bernanke said there are “positive developments” in the labor market, adding that “the job market remains far from normal.” The shared currency weakened earlier after the European Central Bank awarded 529.5 billion euros ($705 billion) in a second round of three-year loans to banks, increasing the supply of euros. Higher-yielding currencies pared gains against the dollar and Treasuries fell.
“Bernanke’s cautious optimism did come from left field in terms of a hard reminder for euro-dollar traders that the development of balance sheets is the most important factor driving currencies,” said Kathy Lien, director of currency research with the online-trading firm GFT Forex in New York. “That the Fed didn’t feel any type of urgency to expand their balance sheets was very positive for the dollar.”
The dollar rose 0.9 percent to 81.15 yen at 5 p.m. in New York after earlier falling as much as 0.3 percent. The greenback surged 1 percent to $1.3325 per euro and the common currency fell 0.2 percent to 108.13 yen.
Brazil’s real was the biggest loser among the major currencies after the nation said it’s considering measures to stem gains in the real, the world’s second best performing major currency this year after Mexico’s peso, a government official familiar with internal discussions said.
The real dropped 1.3 percent to 1.7174 per dollar. The currency earlier gained as much as 0.4 percent to 1.6890, the strongest level since Oct. 31.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.7 percent to 78.805.
The U.S. economy expanded at a “modest to moderate pace” in January and early February, fueled by manufacturers, including automakers, the Fed said today in its Beige Book business survey.
“We have seen some positive developments in the labor market,” Bernanke said in prepared testimony to the House Financial Services Committee in Washington. He said keeping monetary stimulus is warranted even as the unemployment rate falls.
The unemployment rate dropped to a three-year low of 8.3 percent in January, and a government report today showed that the economy expanded at a 3 percent pace in the fourth quarter, up from an initial estimate of 2.8 percent.
Bernanke said that “in light of the somewhat different signals received recently from the labor market than from indicators of final demand and production, however, it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery.”
The Fed has bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 until June 2011. Central bank officials were keeping open the option of a third round of bond purchases at their January meeting in case the economy weakens or inflation falls too low.
The 17-nation euro declined versus most of its 16 major counterparts as the ECB auction of three-year loans surpassed the 470 billion euros forecast by economists. The Frankfurt-based central bank said it will lend the funds to 800 financial institutions. In its first three-year refinancing operation in December, 523 banks borrowed 489 billion euros.
“The big market reaction in recent days has been in the degree to which short-term spreads between Spain and Italy have converged with respect to Germany,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York.
The difference, or spread, between Spanish two-year bond yields and those of similar-maturity German bunds has narrowed to 213 basis points, or 2.13 percentage points, from as high as 563 basis points in November. The spread between two-year Italian bond yields and bunds narrowed to 195 basis points today, from a high of 720 basis points in November.
Bond yields rose earlier in Portugal, prompting the ECB to buy the nation’s government bonds, according to two people with knowledge of the transactions who declined to be identified because the trades are confidential.
The yield on two-year Portuguese notes fell 10 basis points, after rising as much as 37 basis points, to 12.70 percent.
The Standard & Poor’s 500 Index fell 0.5 percent and the yield on 10-year Treasuries rose three basis points to 1.97 percent.
South Africa’s rand fell 0.5 percent against the dollar to 7.5063 after earlier rising as much as 0.9 percent.
The yen fell against all of its 16 major counterparts this month, dropping 8 percent against nine developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar fell 1.4 percent and Norway’s krone, the best performer among the 10 currencies, rose 3.9 percent.