Spain sees demand at bond auction; BOE holds policy steady
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The dollar pared its decline on Thursday, pushing the euro back under $1.26, after Federal Reserve Chairman Ben Bernanke said the central bank stands ready to act in the event that financial stresses from the European crisis escalate.
The dollar index DXY +0.02% , which measures the greenback’s performance against a basket of six major currencies, pared its losses to 82.227, compared with 82.264 in North American trade late Wednesday.
The euro EURUSD -0.18% traded at $1.2565, after topping $1.26 and from $1.2561 Wednesday.
After hitting its lowest level in almost two years, the euro has bounced about 2% this month, which analyst say is largely attributable to traders reversing positions against the shared currency.
Bernanke, however, also said in testimony to Congress that he still forecasts that U.S. growth will continue at a moderate pace -- which may preclude the need to act, either by expanding its current bond maturity swap or outright buying of more debt.
Late Wednesday, Janet Yellen, the Fed’s No. 2 official after Bernanke, said the central bank remains open to the idea of further monetary policy easing if the growth recovery was too sluggish, downside risks became “sufficiently great,” or if there was a threat of deflation. Read story on Fed’s Yellen.
The euro and stocks were higher before his comments, as China’s surprise rate cut boosted in equities and sapped safe-haven demand for the U.S. currency.
China’s move -- its first cut in interest rates since 2008 -- showed some determination among monetary-policy setters to combat the slowdown in global growth, adding to expectations that the U.S. Federal Reserve may demonstrate the same.
Alongside reports that European officials are moving toward a rescue plan for Spain’s banks, policy responses are “hastening the shoring up of European finances and resulting in a floor being constructed for risk,” said Douglas Borthwick, strategist at Faros Trading, before Bernanke’s testimony..
Other central banks seem to be sitting on the sidelines to see what European governments do about their debt problems and, at the earliest, how the Greek election in a couple weeks comes out.
Also Thursday, the Bank of England, as expected, left its policy unchanged, spurring a relief rally in the British pound GBPUSD +0.36% , which jumped to $1.5542, from $1.5486 Wednesday. Bank of England on hold.
And on Wednesday, the European Central Bank made no major changes or announcements.
“The BOE follows the unchanged policy of the ECB, and fits with the thesis that central banks that have few policy options are keeping their powder dry and all their options open until they know more about the European situation post June 17th,” said Alan Ruskin, global head of G-10 foreign-exchange strategy at Deutsche Bank.
Some small improvement in the outlook for Europe could also be seen in Spain’s debt auction earlier, in which the country sold 2.07 billion euros -- more than expected thanks to good demand for the closely-watched auction.
Recently, Spanish government officials bemoaned rising yields on its debt, saying it was a factor that was shutting the country out of the bond markets. Read story on the Spanish bond auction.
“The odds are steadily increasing that Spain will ask for help in its banking recapitalization, but we also caution that the timeline may not be as imminent as some press reports suggest,” said Sue Trinh, senior currency strategist at RBC Capital Markets. “The Spanish [finance minister] has said that they aren’t seeking immediate bank aid.”
Japanese yen, Australian dollar
The U.S. dollar USDJPY +0.47% held some of its gains against the Japanese currency, buying ÂĄ79.58 compared with ÂĄ79.17 in late Wednesday trading.
After a a Group of Seven conference call earlier this week, comments from a Japanese official reignited worries about official intervention, weighing on the yen.
The dollar also recovered some of its losses versus the Australian dollar, which rose after the country’s positive jobs report. Read about Australia’s jobs data.
The Australian dollar AUDUSD +0.06% bought 99.41 U.S. cents, up from 99.09 cents Wednesday. It briefly touched party -- with one aussie buying one greenback -- and has jumped 3% this week.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Varahabhotla Phani Kumar in Hong Kong contributed to this report.
