Dollar drops as Bernanke says Fed pause possible

The dollar tumbled to a seven-month low against a basket of major currencies on Thursday after Federal Reserve chief Ben Bernanke gave the clearest signal yet that the current campaign of raising interest rates may be coming to an end.
The dollar extended losses made earlier in the week after finance chiefs of the Group of Seven major industrialised nations urged China and other Asian countries to let their currencies rise to help mend global imbalances.
Against the dollar, the euro spiked above the psychologically important $1.2500 level to $1.2548, the highest since September 2005, after Bernanke in congressional testimony said "at some point in the future" a pause in rate increases may happen.
"The acknowledgement by Bernanke that the Fed may pause any time soon is a massive dollar negative event," said David Mozina, head of foreign exchange strategy with Lehman Brothers in New York.
The dollar slid to a seven-month low against a basket of major currencies as traders took Bernanke's remarks to mean the Fed may stop raising rates after an expected quarter-percentage-point increase in May to 5.0 percent.
An end to the Fed's current rate increasing cycle, which widened the US advantage over other major currencies, would largely remove a major pillar of support for the dollar that helped it rally 12 percent last year, especially as the euro zone and Japan both could be tightening policy later this year.
"It is getting harder to ignore the erosion of the factors that supported the dollar last year," said analysts with Citigroup in a note to clients. "Better growth prospects outside of the United States are attracting the attention of investors who shipped capital into the United States at record rates last year."
Bernanke dealt another blow to the dollar by saying that global imbalances, a term often used to refer to the gaping US trade deficit and surpluses in Asian countries such as China may affect the currency.
He later said G7 finance chiefs had not discussed weakening the dollar to tackle the US current account deficit when they met over the weekend, but that did little to stem the dollar's sell-off.
Some analysts maintained that the market's response to the G7 statement was correct and the dollar has further to decline.
The dollar's three-year decline to the end of 2004 was largely driven on concerns that financing the US current account deficit was not sustainable, particularly as central banks increasingly diversify their dollar holdings.
Sterling on Thursday shot up more than 1 percent to a seven-month high of $1.8045, before paring its gains a little to trade at $1.8030.
The dollar dropped to a three-month low of 113.84 yen but last traded at 114.11 yen, down 0.5 percent on the day. Against the Swiss franc, the dollar fell to 1.2578 francs before recovering slightly to 1.2596, still sharply lower on the day.