Dollar gains as Trichet seconds Bernanke

AP News
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Posted: Nov 17, 2009 3:47 PM

The dollar surged higher Tuesday after European Central Bank president Jean-Claude Trichet seconded Federal Reserve Chairman Ben Bernanke's support for a strong buck.

But analysts said it was likely just a blip in the greenback's downwards trend.

Meanwhile, the Treasury Department said foreigners' demand for long-term U.S. financial assets rose in September. China, the biggest foreign holder of U.S. Treasurys, added to its stock of government debt.

China, among other developing countries, has raised concerns about the value of their reserves as the dollar drops.

Their continued investment in Treasurys is crucial for funding record-high budget deficits in the U.S.

In late New York trading Tuesday, the 16-nation euro fell to $1.4855 from $1.4987 late Monday, while the British pound dropped to $1.6797 from $1.6836. The dollar rose to 89.32 Japanese yen from 88.98 yen.

On Monday, the greenback hit a 15-month low against a basket of six currencies despite Bernanke's rare comment on the dollar. In a speech in New York, he said the central bank was following foreign exchange markets closely. The Fed's policies and the "underlying strengths" of the U.S. economy would "help ensure that the dollar is strong and a source of global financial stability."

He reiterated his commitment to long-term rock-bottom interest rates, however, helping sink the dollar. Lower interest rates can drive down the value of a currency as investors transfer funds in search of assets that yield higher returns.

Meanwhile, on Tuesday, ECB President Trichet said in an interview with French newspaper Le Monde that Bernanke's comments on the dollar were "very important," and the euro was not designed to be a reserve currency.

But those statements of support aren't reassuring dollar bears, who point to low U.S. interest rates and a record budget deficit.

Investors think there's "not much concern on the official side about the dollar," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York. "The green light is still there to sell dollars ... today's move should be seen as a correction."

The safe-haven dollar has tended to trade inversely with stocks, which are seen as riskier, since last summer. In midafternoon trading Tuesday, the Dow Jones industrial average was down less than 0.1 percent, while the Standard & Poor's 500 tilted 0.2 percent lower as data on U.S. industrial production wasn't as strong as economists had expected.

Also on Tuesday, the head of the International Monetary Fund said China should let its yuan rise in order to help ease global trade imbalances.

President Barack Obama is visiting Beijing amid strains over trade and China's currency. U.S. manufacturers maintain the yuan, which is effectively pegged to the dollar, is undervalued. That gives Chinese exporters an unfair price advantage compared to U.S. companies, they claim. Finance officials of other Asian countries have also complained about China's monetary practices as their currencies appreciate, potentially harming exports.

IMF managing director Dominique Strauss-Kahn said he had "very little insight" into when China might let the yuan rise.

In other trading Tuesday, the dollar rose to 1.0524 Canadian dollars from 1.0467 late Monday, and gained to 1.0175 Swiss francs from 1.0068 francs.