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Dollar Falls to Record Against Euro After Bernanke's Comments
Jan. 5 (Bloomberg) -- The dollar dropped to a record low against the euro in Asia after Federal Reserve Governor Ben S. Bernanke said the risk of a dollar crisis is ``quite low'' and that valuing the currency only against the euro may be ``misleading.''
``Looking at movements of the dollar against a single currency can be misleading about overall trends,'' Bernanke said in the text of a speech to the American Economic Association's annual meeting in San Diego. ``Broader measures of dollar strength show somewhat less of a decline.''
Against the dollar, the euro rose 20 percent last year after the Fed said it can keep rates low well into 2004. Bernanke's comments suggested Fed policy makers aren't concerned the dollar's decline will stoke inflation, forcing the central bank to raise rates.
Bernanke's comments ``suggested the U.S. will maintain the low interest rates for a while, triggering a new round of dollar selling on the first trading day of the year'' in Japan, said Kikuko Takeda, manager of the foreign exchange and treasury division at Bank of Tokyo-Mitsubishi Ltd., a unit of Japan's third-biggest lender.
The U.S. currency weakened to $1.2653 per euro at 10:25 a.m. in Tokyo from $1.2585 late Friday in New York after sinking to a record low $1.2672. The dollar may drop to as much as $1.29 per euro at the end of March, Takeda said. The dollar was also at 106.91 yen from 107.07.
The European Central Bank, whose benchmark rate is twice the Fed's 1 percent interest rate target for overnight loans, suggested it's comfortable with the currency's advance. Bernanke's currency comments were included in his remarks about the outlook for inflation and Fed interest-rate policy.
Inflation Impact
The dollar's decline, which makes overseas goods more expensive for Americans to buy, should not raise inflation expectations because imports have only a ``modest'' weight in the goods and services, purchased by consumers, Bernanke said.
``The direct effects of dollar depreciation on inflation, like those of commodity price increases, appear to be relatively small,'' Bernanke said. A 10 percent decline in the broad value of the dollar might push up consumer prices, not the inflation rate, by just 0.1 percent to 0.3 percent over time, he said.
Trade Weighting
Judging the dollar's strength or weakness solely against the euro may also be ``misleading,'' because its value against the currencies of major trading partners remains about 7 percent above its average in the 1990s and 17 percent above the low it reached in 1995, Bernanke said.
U.S. President George W. Bush's administration is untroubled by the dollar's decline, which may help boost sales and manufacturing jobs in an election year without an acceleration of inflation or higher interest rates.
Signaling tolerance, U.S. Treasury Secretary John Snow told Bloomberg News last month the currency's drop had been ``orderly.'' While he and Bush regularly endorse a ``strong dollar'' they say they want markets, not governments, to set exchange rates.
Compared with the euro's gain against the dollar last year, the yen's rise versus the U.S. currency was smaller at 11 percent in part as Japan spent more than 20 trillion yen ($187 billion) to stem the appreciation that threatens the export-led recovery.
Mizoguchi
Zembei Mizoguchi, vice finance minister for international affairs, said Japan will sell its currency if necessary.
``We will keep a close watch on the market to ensure there won't be excessive fluctuations and overshooting,'' Mizoguchi told reporters at the Ministry of Finance. ``We will take action as needed.''
The stronger yen risks eroding demand for Japanese exports. The world's second-largest economy will expand 1.8 percent in the year starting April 1 as companies increase spending and exports rise, the government said on Dec. 19.
Toshiba Corp., the world's third-largest chipmaker, predicted the yen's exchange rate would average 115 in the second half of the fiscal year that ends March 31. Nissan Motor Co. forecast a rate of 110. Many Japanese companies gave projections when they reported earnings for the six months ended Sept. 30.
Japanese Stocks
The dollar may also drop against the yen on speculation overseas investors will extend their purchases of Japanese shares this year.
Japan's currency climbed 11 percent last year against the dollar as the Nikkei 225 Stock Average rose 24 percent, the first gain in four years. The benchmark stock index rose as much as 1.6 percent on the first trading day of the year in Japan.
``Overseas investors look bullish on Japanese equities, setting up the ground for the yen to gain further,'' said Minoru Shioiri, foreign exchange manager in Tokyo at Mitsubishi Securities Co.
The dollar may drop below 105 in the first quarter, Shioiri said.
Last Updated: January 4, 2004 20:29 EST
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