The dollar hit a three-week high versus the yen and rose against the euro on Thursday as buying from hedge funds and investors at the start of Japan's fiscal year offset gloomy remarks by Federal Reserve Chairman Ben Bernanke.
The US currency fell overnight and remained pressured earlier in the session after Bernanke said the US economy may fall into recession in the first half of 2008, hurting sentiment towards the dollar.
"Cash positions had been building up as investors held back from buying the dollar even when sentiment began to improve after the Bear Stearns bailout, as the Easter holidays and quarter-end and Japan's fiscal year-end came in between," said a senior dealer at a Japanese trading house. "Such dollar-buying needs overshadowed what would have been dollar-negative comments from Bernanke," he said.
The dealer added that market players may be picking up on what suits their current positive sentiment, such as Bernanke expecting a recovery later in 2008 or stressing rising uncertainty about the inflation outlook. The dollar also benefited from lingering hope that the worst of the credit crisis was over.
Bernanke's remarks came at a time of improving sentiment among traders over the credit market woes, with US investment bank Lehman Brothers raising $4 billion on Tuesday to shore up its balance sheet.
"Market players are buying the dollar back on optimism that the sharp downturn in the credit market is bottoming out," said a trader at a Japanese trust bank. The euro fell 0.4 percent to $1.5623 after rising 0.5 percent on Bernanke's comments on Wednesday. The euro has come under pressure as players see the single currency's recent push to a record high $1.5905 as being a bit too forced.
The dollar was up 0.5 percent at 102.75 yen It climbed to a three-week high of 102.85 yen, up from the day's low of 102.22 yen. The US unit rose 0.6 percent to 1.0140 Swiss francs after falling 0.4 percent on Bernanke's comments, while sterling slipped 0.1 percent to $1.9858 after gaining 0.6 percent.
Financial markets had regained some stability following aggressive steps by the Fed to calm credit market turmoil and prevent the US economy from deteriorating sharply. They also found some solace after J.P. Morgan Chase agreed to acquire ailing US investment bank Bear Stearns last month.
"The comments (from Bernanke) are definitely not dollar-positive and cooled optimism about the credit problems which have been spreading recently," said a senior dealer at a European bank.
He said the dollar's falling trend may be contained in the near term by various factors such as investors returning to carry trades, Japanese buying of foreign assets at the start of the new business year and short-covering of recent deep dollar selling. Traders are now eyeing Friday's US employment report, which is expected to show the economy shed jobs in March for a third straight month, with economists seeing a 60,000 cut after a 63,000 loss in February.
But a report on Wednesday from ADP Employer Services surprised markets by showing the economy added 8,000 private-sector jobs in March against market expectations for a 48,000 loss.
The Fed has cut its benchmark interest rate since September to 2.25 percent from 5.25 percent, while the European Central Bank has held rates firm at 4 percent to fend off euro zone inflation, which hit a record high in March.
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