BLBG: Dollar Rises Against Euro on Bernanke, Report on Services
The dollar rose against the euro for the first time in three days as Federal Reserve Chairman Ben S. Bernanke said the U.S. economic contraction may be easing and a report showed services industries shrank at a slower pace.
Australia’s dollar appreciated to the highest level against the greenback since October after the Reserve Bank held the target lending rate at 3 percent. The euro fell against the dollar after a report showed European producer prices dropped in March by the most in 22 years, bolstering the case for more action by the European Central Bank to revive economic growth.
“Bernanke sounded positive on housing,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “What else could he say? But there is not a lot of conviction. Once the euro started to slip, the markets were quick to cut risk positions.”
The U.S. currency advanced 0.5 percent to $1.3347 per euro at 10:57 a.m. in New York, from $1.3406 yesterday. It earlier slid to $1.3438, the weakest level since April 6. The dollar was little changed at 98.85 yen, compared with 98.80. The euro dropped 0.4 percent to 131.90 yen, from 132.45.
The dollar gained versus the euro as Bernanke’s remarks before the congressional Joint Economic Committee echoed last week’s central bank statement that the outlook has “improved modestly” since March. He gave no indication that the Fed intends to retreat from its unprecedented policy of keeping the overnight target close to zero and boosting credit through emergency-loan programs and asset purchases.
Services Industries
Service industries in the U.S. contracted in April at the slowest pace in six months, another sign the economic slump is gradually abating.
The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 43.7, from 40.8 in the prior month, according to the Tempe, Arizona-based group. Readings below 50 signal contraction.
The London interbank offered rate that banks charge for three-month dollar loans fell below 1 percent for the first time as credit markets showed signs of thawing.
Three-month Libor for dollars decreased two basis points, or 0.02 percentage point, to 0.99 percent, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed today to the lowest level since Sept. 1.
U.S. Banks
Banks are formulating plans for filling their capital requirements, much of which would likely come from conversions of preferred shares, people familiar with the situation said. The Fed plans to deliver results of stress tests on U.S. banks to executives today that may show about 10 companies need more capital to weather a deeper recession, the people said.
Australia’s dollar appreciated for a third day against the greenback, rising 0.3 percent to 74.21 U.S. cents after policy makers left the overnight cash target at the lowest level in 49 years. Reserve Bank Governor Glenn Stevens said government spending, lower borrowing costs and a pickup in China’s economy will drive a rebound. The Aussie touched 74.79 U.S. cents, the highest level since Oct. 6.
The European Central Bank will probably lower the benchmark rate by a quarter-percentage point to 1 percent, according to a Bloomberg survey of economists. That would be the lowest level since the bank took charge of monetary policy in 1999.
Wholesale Prices
Wholesale prices in the 16-nation euro region fell 3.1 percent in March from a year earlier, after a 1.7 percent drop in the previous month, the European Union’s statistics office said in Luxembourg today. That was the biggest decline since February 1987.
The euro region’s economy may shrink 4 percent this year and 0.1 percent in 2010, the European Commission said yesterday. The commission expects inflation will average 0.4 percent this year, which would be the lowest since the currency’s introduction a decade ago.
While the ECB may cut its main rate to a record low, President Jean-Claude Trichet declined in recent weeks to comment on what other steps the central bank may take to stem the recession.
“The ECB needs a package with a ‘shock and awe’ effect,” UBS AG analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist, wrote in a research note yesterday. “A token or tame step, which some still expect, would add very little value to policy. We continue to see the euro-dollar at $1.30 in one month.”
