Dollar retreats on Bernanke comments

AP News
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Posted: Dec 07, 2009 5:34 PM

The dollar retreated somewhat late Monday after hitting its highest level against a basket of major currencies since the first week of November, as comments from Federal Reserve Ben Bernanke squashed traders' expectations of higher U.S. interest rates.

Higher interest rates can support a currency as investors move funds to where they earn better returns.

On Monday, the U.S. dollar index, which measures the dollar against a basket of six other major currencies, rose to its highest point since Nov. 4. But it edged down after Bernanke warned it's too soon to know whether the economic recovery will last and pledged to hold rates at record-low levels for an "extended period."

The Federal Reserve has kept the key federal funds rate at a range near zero since last December because it expects the unemployment rate to remain high and inflation low.

On Friday, the government said the unemployment rate dropped to 10 percent in November from 10.2 percent in October, raising hopes for a sustained recovery in the labor market. It also increased investors' expectations that the Fed could start hiking rates sooner than expected, perhaps even as early as the first half of next year.

That propelled the dollar higher Friday, and its gains continued early Monday until Bernanke's comments to the Economic Club of Washington made clear he thinks the economy will struggle even as it recovers from the recession.

"Chairman Bernanke has dashed hopes of an early rate hike by warning that the U.S. economy faces significant headwinds and the pace of recovery may not be adequate to generate a large number of new jobs," Brown Brothers Harriman analysts wrote in a research note.

In late New York trading, the 16-nation euro fell to $1.4823 from $1.4827 on Friday. Earlier in the session, the euro tipped below $1.48 for the first time since Nov. 20.

Meanwhile, the British pound inched up to $1.6439 from $1.6429, while the dollar dipped to 89.48 Japanese yen from 90.70 yen.

The dollar rose to 1.0192 Swiss francs from 1.0188 francs, but slipped to 1.0531 Canadian dollars from 1.0589 late Friday.

The dollar's jump on the good jobs news jobs Friday was a break in its normal trading pattern over the past year. Investors have tended to use the low-yielding dollar as a haven, buying it and U.S. Treasurys whenever economic or corporate news made them anxious about the health of the U.S. and global economy.

Analysts said the dollar's bounce on top of the jobs report might herald a return to a more historically normal trade, in which the dollar gains when investors feel confident about the prospects of the U.S. economy and falls on weaker-than-expected tidings or economic insecurity.