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06.06.2006 Business & Finance

Dollar rises vs. yen, flat vs. euro low after Bernanke

By MarketWatch
Dollar rises vs. yen, flat vs. euro low after Bernanke
06.06.2006 LISTEN

NEW YORK (MarketWatch) -- The dollar rose against the yen and was little changed versus the euro Monday, after hawkish comments from Federal Reserve Ben Bernanke stoked expectations the Fed will raise interest rates later this month.
The greenback recovered from a 13-month low against the euro touched earlier in the session on speculation that the European Central Bank will raise rates more aggressively than expected this week.
"Bernanke's surprisingly hawkish comments and concern about inflation signals that we'll still see a quarter point hike at the end of this month," said Kathy Lien, chief strategist at FXCM. "For the time being, he is still discounting the weakness in recent data by citing strength elsewhere."
Late in New York, the euro was at $1.2907, compared with $1.2918 late Friday, after rising as high as $1.2979, the highest level since May 5, 2005. The dollar changed hands at 112.16 yen, compared with 111.65 yen. The euro strengthened to 144.98 yen, the highest level since April 21, 2006 and last traded at 144.79 yen from 144.35 yen.
The British pound was fetching $1.872 against $1.8733. The dollar traded at 1.2075 Swiss francs compared with 1.2137 francs. See live currency prices.
Brian Dolan, director of Research at Gain Capital, cautioned that while Bernanke's comments are highly suggestive of him "leaning toward another rate hike," his observations that the economy is slowing suggests "additional rate hikes will be dollar-negative."
"Slowing growth and rising inflation, aka stagflation, is one of the worst combinations for a currency in that it undermines overall asset attractiveness," Dolan said. "This means that further hawkish rate rhetoric is unlikely to benefit the U.S. dollar and will slowly come to be seen as an outright dollar negative."
The Fed has increased interest rates at 16 consecutive meetings since June 2004, which has given the dollar a very attractive yield differential versus the euro and yen. The FOMC next meets on June 28-29.
Bernanke lifts up buck
Although the anticipated slowdown in growth is underway, financial markets should not question the inflation-fighting credentials of the Federal Reserve, Fed chief Ben Bernanke said Monday.
"There is a strong consensus" among FOMC members to keep inflation low, Bernanke said.
Recent core inflation readings "have been higher in recent months" and "has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth," Bernanke said.
These core readings "are unwelcome developments," he said. "Therefore, the FOMC will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained," Bernanke said. See full story.
Bernanke appeared with ECB president Jean-Claude Trichet and Bank of Japan deputy governor Toshiro Muto at an afternoon monetary conference in Washington.
Earlier, the dollar showed little reaction to a report that showed nonmanufacturing sectors of the U.S. economy expanded at a slower pace during May.
The ISM nonmanufacturing index fell to 60.1% from 63.0% in April, the Institute for Supply Management said Monday. Economists were looking for the index to fall to 60.5%. Inflation pressures continued to mount. The price index surged to 77.5% from 70.5% in the previous month.
Euro underpinned by rate outlook
The euro was supported by speculation that the ECB will raise rates by 50 basis points rather than previously expected 25 basis points at its monthly meeting announcement on Thursday.
The recent run of strong economic data out of the euro-zone "has convinced many players that ECB will risk the potential of even greater appreciation in the euro/dollar in order to contain the rapidly expanding inflationary pressures in the 12-member region," Boris Schlossberg, senior currency strategist at FXCM said.
Interest rate in the euro-zone currently stands at 2.5%.
Trichet said on Monday that he would give no hints about the upcoming rate decision.
The euro also rose to a six-week high against the yen Monday following news that Yoshiaki Murakami, Japan's most prominent fund manager and shareholder activist, was arrested for allegedly violating securities laws.
At a press conference earlier in the day, Murakami admitted he engaged in insider trading, but said he was not aware he was violating the law at the time.
On Friday, Japanese media reported that Murakami was under investigation by Tokyo prosecutors. He is suspected of acquiring a large stake in radio operator Nippon Broadcasting System after being tipped off about an upcoming takeover bid by internet retailer Livedoor.
BOJ's Muto said Monday that he expects the Japanese economy to remain on a balanced and sustained growth path. He added that Japanese monetary policy will be dependent on the course of the economy and the current low rate environment can be maintained for some time.

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