Bloomberg News

Dollar Gains as Bernanke Dashes Expectations for More Stimulus

June 22, 2011

June 22 (Bloomberg) -- The dollar rose against the euro and the yen as Federal Reserve Chairman Ben S. Bernanke dashed expectations the central bank would expand stimulus measures, easing concern policies would further debase the currency.

The greenback gained from a one-week low against the euro. The Fed said after a two-day meeting that it will maintain record monetary stimulus to support a flagging economic recovery after completing a $600 billion bond-purchase program this month. There was no mention of additional versions of the program, the second round of quantitative easing.

“He essentially ruled out any possibility of QE3,” said Boris Schlossberg, director of research at the online currency trader GFT Forex in New York. “You’re seeing a mild pro-dollar reaction mainly because he clearly indicated that for the time being there will be no more dilutive factors in monetary policy.”

The dollar rose 0.4 percent to $1.4357 per euro at 5 p.m. in New York, from $1.4412 yesterday. Earlier it fell as much as 0.2 percent to touch $1.4442, the weakest since June 15, and gained as much as 0.5 percent. The greenback rose 0.1 percent to 80.29 yen, from 80.21 yen, after earlier falling 0.2 percent. The euro fell 0.3 percent to 115.28 yen, from 115.60.

“The committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings,” the Federal Open Market Committee said in a statement after meeting in Washington.

Gross on Twitter

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said today in a Twitter posting the Fed may hint in August of plans for additional monetary stimulus.

“Next Jackson Hole in August will likely hint at QE3/interest rate caps,” wrote Gross, referring to the central bank’s annual symposium in Jackson Hole, Wyoming.

Bernanke said at the event last August that the Fed would “do all that it can” to ensure a continuation of the economic recovery and that more securities purchases might be warranted. Policy makers began the $600 billion U.S. debt-purchase program in November.

The Fed chief told reporters at a press conference today that the central bank is in a “different position” than it was in last August, when deflation was a “nontrivial risk.”

Rate Unchanged

The central bank kept its benchmark interest rate at zero to 0.25 percent, where it’s been since December 2008 to support the economy. The decision matched forecast of 86 of the 87 economists in a Bloomberg News survey. One analyst predicted a gain to 0.5 percent.

The Fed revised its economic forecasts for this year and next, predicting the U.S. economy will expand by 2.7 percent to 2.9 percent this year, down from April’s forecasts of 3.1 percent to 3.3 percent, based on the median range of projections. Inflation excluding food and energy prices will range from 1.5 percent to 1.8 percent this year, the projections today showed, up from 1.3 percent to 1.6 percent in the April forecasts.

The euro slid earlier versus the greenback on speculation Greek Prime Minister George Papandreou will struggle to pass austerity measures, even after winning a confidence vote yesterday. Papandreou will seek approval next week for a 78 billion-euro ($112 billion) package of budget cuts and asset sales to help ensure more financial aid from the European Union and the International Monetary Fund and stave off the threat of default.

‘Global Spillovers’

The IMF, contributor of a third of the bailout money for Greece and the two other euro-area countries that have received bailouts, Ireland and Portugal, has warned EU leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.”

“The Greek news is one step that they had to make yesterday,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “The next step is now passing some sort of an austerity plan, and that’s going to be a significant challenge.”

The pound fell for the first time in four days against the greenback as minutes of the latest Bank of England meeting showed some policy makers saw a risk that more bond purchases may be required.

Sterling weakened 1.1 percent to $1.6071 and depreciated 0.7 percent to 89.33 pence per euro.

‘Current Weakness’

The majority of the Monetary Policy Committee said the “current weakness of demand growth was likely to persist for longer than previously thought,” according to minutes of the June 8-9 Bank of England meeting published today in London. Europe’s debt crisis highlighted the potential for further shocks, and for some members, it “was possible that further asset purchases might become warranted,” the notes showed.

Norway’s krone was the biggest gainer among the dollar’s 16-most traded counterparts after the Norges Bank kept its benchmark interest rate on hold at 2.25 percent and said gradual increases are projected for the second half of the year.

The krone climbed 1.2 percent to 7.8107 per euro and appreciated 0.8 percent against the dollar to 5.4411.

--With assistance from Joe Ragazzo in New York. Editors: Greg Storey, Dave Liedtka

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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