By Kevin Plumberg
Reuters
Thursday, April 27, 2006
http://today.reuters.co.uk/investing/financeArticle.aspx? [1]
type=usDollarRpt&storyID=2006-04-
27T202853Z_01_N27449559_RTRIDST_0_MARKETS-FOREX-UPDATE-13.XML
NEW YORK -- The dollar tumbled to a seven-month low against a basket
of major currencies on Thursday after Federal Reserve chief Ben
Bernanke gave the clearest signal yet that the current campaign of
raising interest rates may be coming to an end.
The dollar extended losses made earlier in the week after finance
chiefs of the Group of Seven major industrialized nations urged
China and other Asian countries to let their currencies rise to help
mend global imbalances.
Against the dollar, the euro spiked above the psychologically
important $1.2500 level to $1.2548, the highest since September
2005, after Bernanke in congressional testimony said "at some point
in the future" a pause in rate increases may happen.
"The acknowledgment by Bernanke that the Fed may pause any time soon
is a massive dollar negative event," said David Mozina, head of
foreign exchange strategy with Lehman Brothers in New York.
The dollar slid to a seven-month low against a basket of major
currencies <.DXY> as traders took Bernanke's remarks to mean the Fed
may stop raising rates after an expected quarter-percentage-point
increase in May to 5.0 percent.
An end to the Fed's current rate increasing cycle, which widened the
U.S. advantage over other major currencies, would largely remove a
major pillar of support for the dollar that helped it rally 12
percent last year, especially as the euro zone and Japan both could
be tightening policy later this year.
"It is getting harder to ignore the erosion of the factors that
supported the dollar last year," said analysts with Citigroup in a
note to clients. "Better growth prospects outside of the United
States are attracting the attention of investors who shipped capital
into the United States at record rates last year."
Bernanke dealt another blow to the dollar by saying that global
imbalances, a term often used to refer to the gaping U.S. trade
deficit and surpluses in Asian countries such as China, may affect
the currency.
He later said G7 finance chiefs had not discussed weakening the
dollar to tackle the U.S. current account deficit when they met over
the weekend, but that did little to stem the dollar's selloff.
Some analysts maintained that the market's response to the G7
statement was correct and the dollar has further to decline.
"The market is structurally long dollars and they haven't even come
close to selling the amount of dollars that will be needed to be
sold in the coming months," said Matt Kassel, head of currency
strategy with IDEAglobal.
The dollar's three-year decline to the end of 2004 was largely
driven on concerns that financing the U.S. current account deficit
was not sustainable, particularly as central banks increasingly
diversify their dollar holdings.
Sterling on Thursday shot up more than 1 percent to a seven-month
high of $1.8045, before paring its gains a little to trade at
$1.8030.
The dollar dropped to a three-month low of 113.84 yen but last
traded at 114.11 yen, down 0.5 percent on the day. Against the Swiss
franc, the dollar fell to 1.2578 francs before recovering slightly
to 1.2596, still sharply lower on the day.
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