The Wall Street Journal-20080118-Dollar Steady With Euro Despite Negative Factors
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Dollar Steady With Euro Despite Negative Factors
The dollar was unchanged against the euro yesterday despite downward pressure from a batch of weak U.S. data and comments from the head of the Federal Reserve that suggested more interest rate cuts are coming.
Home construction plunged even more than economists were expecting in December, tumbling to its lowest point in 16 years, according to data from the Commerce Department. And a regional manufacturing report showed factory activity contracted in January, which led to dollar- selling.
Testimony by Fed Chairman Ben Bernanke on Capitol Hill also weighed on the dollar as he reiterated a commitment for the Fed to make "substantive" rate cuts at its next meeting if they are needed.
"The market is pricing in more rate cuts from the Fed," said Stephen Gallagher, chief U.S. economist at Societe Generale in New York, adding that the weak housing data "also weighs on the dollar."
For most of the session, the dollar was on its back foot against the euro, but it rebounded late in the session as U.S. stock prices plunged. The volatility created risk aversion that led currency investors to return to the dollar for its global status as a safe harbor.
The weak stock markets gave an even larger boost to Japan's currency as carry traders, who borrow low-yielding currencies such as the yen to buy higher-yielding currencies, unwound these bets. As the risk- averse investors reversed these carry trades, they bought yen to pay back their loans that funded the bets, pushing the yen higher across the board.
The dollar fell as low as 106.59 yen, not far from the 2 1/2-year low of 105.92 it reached Wednesday. The euro hit a low of 156.33 yen.
The euro finished at $1.4657, where it finished Wednesday. The dollar was at 106.68 yen, down from 107.53. The euro was at 156.36 yen, down from 157.60. The United Kingdom pound was at $1.9700, up from $1.9628, and the dollar was quoted at 1.0997 Swiss francs, up from 1.0996.
Much of the pressure on the dollar came from Mr. Bernanke's testimony. Investors interpreted his remarks as a re-confirmation that the Fed is planning to lower its benchmark rate to 3.75% from the current 4.25% at its Jan. 29-30 meeting. Lower rates by the Fed can reduce returns on dollar-based investments, and thus make the dollar less appealing to investors.
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Riva Froymovich contributed to this article.
