The dollar rose on Tuesday as the Federal Reserve's willingness to keep its emergency lending facility open into 2009 for some Wall Street firms calmed fresh credit concerns and encouraged investors to snap up US stocks.
A sharp drop in New York crude oil futures, as well as comments by a top Fed policy-maker that it made "eminent sense" to raise US interest rates as risks to the world's largest economy ebbed, also supported the greenback, analysts said. "Bernanke's comments should take some pressure off from the financially strapped Wall Street, they helped stocks early on. The lower oil price is the other part of the story helping the dollar," said Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston.
Bernanke's remarks came on the heels of renewed credit worries sparked by a Lehman Brothers report that an accounting change could force Fannie Mae and Freddie Mac to raise a combined $75 billion in capital.
Fannie Mae and Freddie Mac are the largest providers of funding for US home mortgages But the Office of Federal Housing Enterprise Oversight, their federal regulator, said on Tuesday, the proposed accounting change should not spur capital changes at the two government-sponsored agencies. The New York Board of Trade's dollar index, which charts the dollar's performance against a basket of six currencies, rose to a session peak of 73.082.
The euro fell as low as $1.5636, according to Reuters data and was last trading at $1.5650, down 0.5 percent. "The dollar's gains are primarily on the back of stabilisation in the stock markets and also on much lower oil price, but we are not seeing a tremendous improvement in the dollar versus euro," said Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago.
The dollar rose 0.3 percent to 107.45 yen, recording its fourth day of gains versus the Japanese currency. Against the Swiss franc, the dollar gained 0.8 percent to 1.0343 francs, while sterling slid 0.3 percent to $1.9686.
Those gains were driven by the surge in US stocks, where key indices climbed by more than one percent. Bernanke said the Fed was considering several options, including extending the duration of the central bank's facilities for primary dealers beyond the end of the year should the current unusual circumstances persist in the dealer funding markets.
Markets expectations of tighter US monetary policy by year-end were boosted by Federal Reserve Bank of Richmond President Jeffrey Lacker's comments that withdrawing some of the stimulus as risks to the economy diminished made eminent sense.
Interest rate futures have fully priced in a 25 basis point hike in the fed funds rate by year-end. The benchmark overnight lending rate is currently at 2.00 percent after it was slashed by 3.25 percentage points since September. Data on Tuesday showing a steep drop in the US pending home sales index for May had only a brief but negative impact on the dollar, suggesting that the housing market is still far from recovery.
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