The dollar slid against the euro and yen on Thursday after Federal Reserve Chairman Ben Bernanke said the US economic outlook had worsened and that the central bank would act as needed to support growth.
In remarks to the Senate Banking Committee, Bernanke said falling home values, a softer job market and high energy prices are expected to hurt consumer spending in the short run.
Bernanke's comments reinforced the impression that the Fed will cut interest rates again, with rate futures pricing in a half-point rate cut in March. The Fed has cut the benchmark rate by 225 basis points in the current easing cycle.
Traders pushed the euro up to $1.4637, up 0.5 percent from Wednesday and close to the $1.4647 session peak. "Bernanke's comments were in line with his recent rhetoric - the focus on the downside risk to economy - and the Fed is going to cut rates again," said Ken Landon, global foreign exchange strategist at J.P. Morgan in New York. Sterling rose 0.3 percent to $1.9683, while the dollar fell from an earlier one-month high of 108.61 yen to 107.96 yen, down 0.3 percent from late Wednesday.
Bernanke also said changes in monetary policy take time to affect the economy and should boost growth in the second half of 2008, and analysts said that limited dollar losses.
"We do expect growth to pick up because of the rate cuts, and there is usually a nine-month lag," said J.P. Morgan's Landon. "But I don't think that will hold him back from cutting rates further. Overall, the market is pretty comfortable with the trajectory of lower rates going forward." For now, that should keep pressure on the dollar, as lower interest rates reduce the appeal of dollar-denominated debt for global investors.
Unlike the Fed, the European Central Bank has held benchmark rates steady at 4 percent, and ECB Governing Council member Axel Weber said on Thursday that policy-makers are more concerned about inflation than growth. Earlier, the dollar got a brief boost from hopes that a narrowing US trade deficit may prevent the economy from slipping into recession.
Analysts said a report showing the December trade gap narrowed by more than expected suggested a weaker dollar was boosting exports, which may keep the economy from contracting. "The trade data will undercut concerns that fourth-quarter growth was going to be revised to negative, and therefore detracts somewhat from fears that the United States will have two consecutive quarters of negative growth - a technically defined recession," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut, in a research note to clients.
The government's first estimate put US growth in the last three months of 2007 at an annualised 0.6 percent, and some fear it may yet be revised downward.
Ruskin said the trade data was positive for the dollar because investors now suspect it may not fall much further against major currencies such as the euro and pound.
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