Business

Tue Jun 03 22:22:25 PDT 2008

By Eric Burroughs

TOKYO, June 4 (Reuters) – The dollar was little changed on Wednesday, holding big gains against the euro and major currencies made the previous day when Federal Reserve Chairman Ben Bernanke issued an explicit warning about the inflationary threat from a weak U.S. currency.

Bernanke said the weak U.S. dollar is adding to price pressures and that the Fed along with the U.S. Treasury is carefully monitoring currency markets, suggesting greater concern in Washington about the dollar and the potential for dollar-supportive intervention.

The dollar’s tumble to record lows this year has caused a vicious circle by adding fuel to the surge in oil and commodity prices and stoking inflation pressures in the United States and around the world.

Bernanke’s comments also suggested the Fed is unlikely to cut interest rates further from 2 percent, and investors are looking for the Fed’s next move to be a rate increase later in the year.

While U.S. Treasury Secretary Henry Paulson has repeatedly said a stronger dollar in is the country’s interest, those comments have largely fallen on deaf ears because Treasury secretaries have stuck to that refrain for years even as the U.S. currency slid.

But Bernanke’s comments struck a chord, especially his saying the U.S. central bank and Treasury were watching currency markets in a reference to the most recent statement by Group of Seven financial leaders, which was seen as a show of support for the dollar.

"We take this as a meaningful shift in rhetoric," said currency strategists at Morgan Stanley in a note to clients, adding that it could help the dollar recover more.

"The Fed would not have made these comments without the support of the Treasury, given that the Treasury has the responsibility for exchange rate policy. In that regard, we can view this as a coordinated signal from U.S. monetary authorities," they said.

But Morgan Stanley said the risk of dollar-buying intervention was low for the time being, though it would be possible with all the G7 powers seeming to be more coordinated in their views on the dangers of a sliding U.S. currency.

The dollar was little changed from late U.S. trade near 105.05 yen after having jumped as high as 105.57 yen the previous day, not far from a three-month high struck last week.

The euro barely budged at $1.5451 after having slid as low as $1.5410, tumbling 1.4 percent from Tuesday’s peak.

The dollar’s trade-weighted index — a gauge of its performance against six major currencies — was flat at 73.312 after surging as much as 1.3 percent from Tuesday’s lows.

Analysts also noted that Bernanke seemed to have changed his tone on the dollar because he had previously highlighted the positive impact on exports, which have helped buoy the U.S. economy and kept it from contracting in the first quarter.

Alan Ruskin, chief international strategist at RBS Greenwich Capital, said Bernanke’s comments will reverberate in markets for a while and showed that the United States no longer had a policy of "benign neglect" on the dollar.

"But the gulf between verbiage and action continues to gape, and will probably not be bridged without the market giving the central banks serious cause," he said in research note.

(Editing by Michael Watson)

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