Dollar Rallies — Three-Month High vs. Euro
Kurt Brouwer June 10th, 2008
Over the past couple of days we have seen a concerted effort by senior Treasury and Federal Reserve officials to bolster the dollar. It appears that the currency markets are starting to believe that the powers that be are serious. These two Bloomberg pieces [emphasis added] spell things out clearly:
Paulson Says Intervention Is Never ‘Off the Table’ (Bloomberg, June 9, 2008, Rebecca Christie & Christopher Anstey)
Treasury Secretary Henry Paulson said he hasn’t ruled out any policy option, including intervention in the foreign-exchange market, to prop up the dollar.
“I would never take intervention off the table or any policy tool off the table,” Paulson said in an interview with CNBC television. Federal Reserve Bank of New York President Timothy Geithner said separately that “no government, nor central bank, can be indifferent to changes in the value of its currency.”
U.S. officials have strengthened their stance on the dollar on concern that its decline threatens to push up inflation, hurting American consumers who are also burdened with sliding home values and record fuel prices. Fed Chairman Ben S. Bernanke said last week that the central bank and Treasury are collaborating to “carefully monitor” exchange rates.
“It certainly seems like they’ve increased their rhetoric,” said Sophia Drossos, a currency strategist at Morgan Stanley in New York who used to work at the New York Fed. “It does seem that there is this heightened focus on dollar policy,” in part because inflation “is becoming a big political issue.”
The dollar extended gains after the comments, sending it up 0.9 percent to $1.5634 per euro and 1.2 percent versus Japan’s currency to 106.22 yen. The dollar has fallen 10 percent in the past year against the currencies of major U.S. trading partners, according to a Fed index…
Dollar Rises Versus Yen, Euro; Bernanke Sees Less Economic Risk (Bloomberg, June 10, 2008, Bo Nielsen & Ye Xie)
The dollar rose to a three-month high against the yen and climbed versus the euro after Federal Reserve Chairman Ben S. Bernanke said economic risks have faded, spurring traders to boost wagers interest rates will rise.
Bernanke said late yesterday that the central bank will “strongly resist” any waning of public confidence in stable prices. “Strong” economic fundamentals will translate to dollar strength, Treasury Secretary Henry Paulson said today in a Bloomberg Television interview in Washington.
“The Fed and the Treasury have signaled what they want: a stronger dollar,” said Jeff Gladstein, global head of foreign- exchange trading at AIG Financial Products in Wilton, Connecticut. “There’s potential for dollar appreciation.”
The dollar rose to 107.26 yen, the highest since Feb. 27, at 12:30 p.m. in New York, from 106.31 yesterday. Against the euro, the dollar climbed to $1.5488, from $1.5646. Japan’s currency traded at 166.07 per euro from 166.33 yesterday.
Futures on the Chicago Board of Trade show a 55 percent chance the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 31 percent the previous day. The contracts show a 97 percent chance the Fed will increase the rate by December, up from 67 percent odds a week ago.
The dollar has fallen 11.6 percent against the euro and 7.3 percent versus the yen since September, when the Fed began to lower borrowing costs from 5.25 percent…
The last comment (in bold) of this second piece makes a point this blog has made many times — the dollar and the Fed Funds rate have a clear relationship. When the Fed Funds rate goes down, the dollar drops also versus the Euro. Ben Bernanke’s comment that he sees ‘less economic risk’ is important because it indicates that he does not see any need for further interest rates cuts. Therefore, the dollar rallies.
For much more on this relationship between interest rates and the dollar, see How Far Has the Dollar Fallen? And Why? — What’s Next?.
- Economy , Geopolitics , Money
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