The Wall Street Journal-20080130-Dollar on Bernanke Watch- Too

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Dollar on Bernanke Watch, Too

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The dollar languished in tight ranges against the euro and the yen as investors held their positions ahead of a decision on interest rates today by the Federal Reserve.

A reading on U.S. durable-goods orders that was much better than expected provided the only price action yesterday, giving the dollar a boost. But even that modest lift was pared back quickly as investors began to suspect the data were an exception to what has been a string of weak U.S. economic reports.

U.S. stocks, which tend to act as a barometer for risk appetite in foreign-exchange markets, also kept a lid on currencies. Stocks rose, but not by a huge margin.

The placid currency-trading environment could change quickly today when the Federal Open Market Committee decides whether to cut interest rates further to stimulate the U.S. economy. Later in the week, important reports on U.S. jobs and manufacturing activity are also likely to rile the dollar.

"Currencies have entered a holding pattern ahead of [today's] FOMC announcement," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York. "This price action of early this week is of limited significance. The reaction of the dollar to the Fed's interest-rate decision, and to employment and manufacturing data, will be more consequential for its performance in coming weeks."

Late yesterday in New York, the euro was at $1.4773 from $1.4784 late Monday, while the dollar was at 107.08 yen from 106.86 yen. The euro was at 158.19 yen from 157.98 yen. The British pound was at $1.9896 from $1.9836, while the dollar was at 1.0929 Swiss francs from 1.0892 francs.

While the dollar was range-bound against the euro and the yen, it was lower against most other currencies.

The pound gained against the dollar as investors reassessed the importance of more possible rate cuts by the British central bank.

"It remains the case that the Bank of England is generally expected to cut rates 25 basis points on Feb. 7," said Robert Lynch, currency strategist at HSBC in New York. "However, that will still leave U.K. base rates at a relative high 5.25%. . . . U.K. yields are still the highest in the G-7 and among the highest in G-10 currencies." A basis point is 1/100th of a percentage point.

Higher interest rates in a country tend to boost the local currency because they increase returns for investors.

Colombia's peso climbed to a two-week high against the dollar of 1948.18 pesos as investors bet that interest rates in the Andean nation will remain high even as the Fed continues to lower its benchmark rate.

The Fed's benchmark rate has been reduced to 3.5% from 5.25% last year and is likely to be cut by at least a quarter percentage point today. At the same time, the key rate set by Colombia's central bank has been on the rise and stands at 9.5%. That spread in rates makes the Colombian peso an enticing bet.