Dollar Gains Most Since 2005 as Bernanke Says Growth Risk Fades

By Bo Nielsen and Ye Xie


June 11 (Bloomberg) -- The dollar may extend the biggest two-day gain versus the euro since 2005 after Federal Reserve Chairman Ben S. Bernanke said economic risks have faded, spurring traders to boost wagers interest rates will rise.

The U.S. currency rose to a three-month high against the yen after Bernanke said late on June 9 that the central bank will ``strongly resist'' any waning of public confidence in stable prices. Economic fundamentals ``compare favorably with those of other industrialized major economies,'' Treasury Secretary Henry Paulson said yesterday in a Bloomberg Television interview in Washington. A Fed report today on economic activity, the so-called beige book, may show an improvement.

Policy makers are trying to ``dispel this notion in the market that the U.S. has a policy of benign neglect to the dollar,'' said Sophia Drossos, a currency strategist in New York at Morgan Stanley, in an interview on Bloomberg Television. ``They are making it very clear that the benefits of a weak dollar are far outweighed by the costs.''

The dollar traded at $1.5453 per euro at 6:45 a.m. in Tokyo, after rising 1.2 percent yesterday. It has surged 2 percent the past two days, the most since Nov. 4, 2005. The dollar traded at 107.40 yen, the highest since Feb. 27. Japan's currency traded at 165.96 per euro from 166.17 yesterday.

Futures on the Chicago Board of Trade show a 52 percent chance yesterday that the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 31 percent the previous day. The contracts showed a 96 percent chance the Fed will increase the rate by December, up from 67 percent odds a week ago.

Crude Oil Drops

The dollar has fallen 11.5 percent against the euro and 7.2 percent versus the yen since September, when the Fed began to lower borrowing costs from 5.25 percent. Crude oil climbed to $137.98 a barrel yesterday in New York before declining. The price more than doubled in the past year.

``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said in a speech at a Boston Fed conference. ``The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''

The Fed is ``aware'' that the weak dollar boosts inflation, Dallas Fed President Richard Fisher said yesterday in response to questions after a speech at the Council on Foreign Relations in New York. Paulson repeated comments made the prior day that currency intervention is a tool for policy makers. He also urged China to loosen government controls on energy prices and the value of the country's currency.

Chinese Yuan

The yuan traded near the highest level since a dollar peg was scrapped in 2005. The currency was little changed yesterday at 6.9255 per dollar in Shanghai, compared with 6.9230 on June 6, according to the China Foreign Exchange Trade System.

A report yesterday showed that the U.S. trade deficit widened in April as the surging cost of oil boosted imports to a record, overshadowing the biggest gain in exports in four years. The gap grew 7.8 percent to $60.9 billion the Commerce Department said.

The two-year U.S. Treasury yields rose 21 basis points to 2.91 percent. The yield advantage of a German two-year bund over a comparable Treasury has narrowed to 1.73 percent from 2.26 percent on June 6, increasing the allure of the dollar- denominated asset.

``You are going to see the dollar rally over the next 12 months,'' said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc. in an interview with Bloomberg Television. ``Global investors are quite underweight the U.S. You could see the beginning of a real reversal of that''

Group of Eight

The U.S. dollar index traded on ICE futures in New York rose 1.16 percent to 73.696, the biggest one-day gain since Dec. 14. The index tracks the dollar against six major trading partners including the yen, euro and pound.

Finance ministers of the Group of Eight industrialized countries may consider joint action to deflate the price of oil and prop up the dollar at their meeting June 13-14 in Japan, said DBS Group Holdings Ltd. in a report to clients.

The last time the major industrialized countries intervened was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. They last propped up the dollar in 1995, when it sank almost 20 percent in four months against the Japanese yen to a post-World War II low of 79.95 yen.

The greenback dropped 1.4 percent against the euro last week, the most since March, after European Central Bank President Jean-Claude Trichet said on June 5 that policy makers may raise borrowing costs in July to contain inflation and the U.S. Labor Department reported the next day that the jobless rate increased the most in May in more than two decades.

The European Central Bank needs to act in a ``forward- looking'' manner in order to ensure price stability, said council member Axel Weber at the University of York yesterday.