WSJ: Dollar Recovers Broad Losses; QE Might Be Priced In
By Bradley Davis
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The dollar recovered Friday from earlier broad losses that came on the heels of a speech by Federal Reserve Chairman Ben Bernanke that kept the door open to another round of economic stimulus.
After falling to its lowest level since December 2009 in the wake of the Bernanke comments, the ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, retraced its losses to post a slight gain on the day.
Investors still consider likely another round of Fed asset purchases, dubbed quantitative easing, said Alan Ruskin, global head of G10 foreign exchange strategy at Deutsche Bank in New York. But after the initial round of knee-jerk dollar selling on the heels of Bernanke's comments, "the sense is maybe the story is priced in for the most part," he said. "Now we've got to wait it out...to get some more detail" on the Fed's possible plan for asset purchases, he said.
"You can't just sell the dollar blindly on that news," Ruskin said, noting Bernanke said nothing particularly new.
Bernanke stopped short of announcing a new policy, saying as the Fed contemplates doing more, officials "will take account of the potential costs and risks" of pursuing unconventional policies, and anything that is done will be "contingent on incoming information about the economic outlook and financial conditions."
A wide swath of currencies in the wake of Bernanke's comments gained to record highs against the dollar in volatile trading before the dollar recouped its losses: The euro touched $1.4161, its highest level since January 2010, while the Australian dollar hit parity with the U.S. dollar for the first time since 1983, when the Aussie was freely floated. The U.K. pound ticked above $1.61 for the first time since January.
With Bernanke's speech and U.S. data released Friday out of the way, weary investors--following weeks of selling the dollar--likely want to pare their riskiest positions ahead of weekend, said Ron Leven, currency strategist at Morgan Stanley in New York, giving the safe-harbor dollar a boost.
Still, so-called QE2 is increasingly seen as imminent, with U.S. data continuing to point to an economy that looks to be on course to avoid a so-called double-dip recession, but one that is registering growth too slow to create jobs and pull steadily and rapidly from its deep recession, analysts say.
Friday morning, the euro was at $1.4040 from $1.4077 from late Thursday, according to EBS via CQG. The dollar was at Y81.46 from Y81.51, after dropping as far as Y80.88, touching the line of its 15-year low. The euro was at Y114.35 from Y114.74. The U.K. pound was at $1.6039 from $1.6013 after gaining to $1.6104. The dollar was at CHF0.9557 from CHF0.9527.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 76.683 from 76.563.
U.S. consumer prices barely budged during September in yet another sign the Fed might need to take action to combat continued weakness in the economy amid concerns about low inflation. U.S. retail sales, meanwhile, rose for a third consecutive month in September, posting a stronger-than-expected increase that should fend off fears of a double-dip recession but doesn't signal a strong recovery.
The middling U.S. recovery contrasts with the strong numbers being posted by Australia, with the Australian dollar reaching parity on the back of the Bernanke comments against the U.S. dollar Friday morning for the first time since the currency was floated in 1983, climbing as high as US$1.0005, according to CQG.
Australia's mining boom, robust labor market and rising interest rates have all helped to shove the Australian dollar some 20% higher against its U.S. counterpart since the middle of this year. With some key central banks still looking to ease conditions further, the Reserve Bank of Australia has already bumped its core cash rate 150 basis points higher since late 2009--a key driver of currency strength.
Separately, China's yuan hit another high under the current system against the U.S. dollar Friday, ahead of an announcement from the U.S. Treasury later Friday on whether to label China as a currency manipulator.
-By Bradley Davis, Dow Jones Newswires; 212-416-2654; bradley.davis@dowjones.com
