BLBG: Dollar Rises Versus Euro After Bernanke Suggests Stimulus Plan
By Stanley White and Ron Harui
Oct. 21 (Bloomberg) -- The dollar rose, approaching an 18- month high against the euro, after U.S. Federal Reserve Chairman Ben S. Bernanke called for further government stimulus measures to avert a prolonged recession.
The greenback also advanced against the Australian and New Zealand dollars on speculation the South Pacific nations will cut interest rates to help sustain economic growth. The euro dropped against the yen as investors bet the European Central Bank will also lower borrowing costs to spur spending.
``An additional stimulus package will support the dollar,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``This shows that U.S. officials are prepared to go far to limit damage to the economy.''
The dollar climbed to $1.3317 per euro as of 3:08 p.m. in Tokyo from $1.3344 late yesterday in New York. It reached $1.3259 on Oct. 10, the strongest since March 2007. The euro dropped to 135.18 yen from 135.92. The U.S. currency traded at 101.50 yen from 101.86. The dollar may rise to $1.3285 today, Soma said.
The Australian dollar fell to 69.24 U.S. cents from 70.44 cents late yesterday in New York after the central bank said it saw a ``strong economic case'' for its Oct. 7 interest-rate reduction. It also declined to 70.28 yen from 71.76.
The U.S. currency has gained 20 percent since touching a record low of $1.6038 per euro on July 15 on speculation the greenback will benefit as the European economy slows.
Stimulus Plan
U.S. Lawmakers should consider ``measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,'' Bernanke said in testimony to the House Budget Committee yesterday. The White House said it is ``open'' to the idea of a new plan, having previously withheld support for additions to a $168 billion package approved in February.
Traders expect the European Central Bank to lower borrowing costs further after cutting the main refinancing rate by half a percentage point to 3.75 percent on Oct. 8 as part of coordinated reductions by major central banks.
The implied yield on the three-month Euribor contract expiring in March fell to 3.41 percent yesterday, the lowest level in seven months. The yield has been 0.23 percentage point higher than the benchmark rate on average over the past year.
``Concerns over a European economic downturn are intensifying,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. ``An ECB rate cut is possible. The euro is becoming a very weak currency.''
The euro may fall to $1.3280 today, he said.
Australian Dollar
The Australian dollar gave up earlier gains against both the yen and the U.S. dollar. Inflation will slow at a faster rate than previously expected amid a global economic slowdown, members of the Reserve Bank of Australia said according to minutes of their Oct. 7 meeting released today in Sydney.
Forces are building that will ``start to dampen pressure on prices,'' Reserve Bank Governor Glenn Stevens said in a speech after the minutes were published. This month's reduction in the overnight cash rate by 1 percentage point to 6 percent was twice as much as economists forecast.
``The headlines are sufficiently gloomy for nervous markets to knock the Aussie lower,'' said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, referring to the currency by its nickname. ``The minutes reflect the extremely worrying conditions at the time and obviously there's only been a degree of improvement.''
Citic Pacific Ltd., the Hong Kong arm of China's biggest state-owned investment company, said yesterday it may lose as much as HK$15.5 billion ($2 billion) on unauthorized currency contracts that went sour as the Australian dollar declined. The currency plunged 28 percent since June 30 against the dollar, the most among the 16 most-active currencies.
Stronger Yen
The yen rose against the euro, the U.S. dollar and the New Zealand dollar on speculation other central banks will follow the RBA by suggesting they will lower rates, reducing the appeal of so-called carry trades.
In carry trades, investors borrow in currencies with low interest rates and invest in nations with higher rates. Japan's target rate of 0.5 percent is the lowest among major economies.
``The RBA minutes are a reason to push the yen higher against the euro and other currencies,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``It's damaging for sentiment toward higher-yielding currencies.''
The New Zealand dollar fell to 62.44 yen from 63.47 yen late yesterday in New York. The Reserve Bank of New Zealand will reduce its benchmark rate by 1 percentage point to 6.5 percent when it announces a policy decision on Oct. 23, according to a Bloomberg News survey of 14 economists.
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
