The Wall Street Journal-20080215-Dollar Sinks on Downbeat U-S- Short-Term Outlook

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Dollar Sinks on Downbeat U.S. Short-Term Outlook

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The dollar declined Thursday in New York against its major rivals after a grim short-term outlook from the Federal Reserve and Treasury.

The euro firmed to a one-week high of $1.4649 and the dollar dropped to an intraday low of 107.76 yen when Fed Chairman Ben Bernanke said in testimony before Congress that next week's release of quarterly Fed forecasts "will show lower projections of growth." Treasury Secretary Henry Paulson added, "I believe that our economy will continue to grow, although its pace in coming quarters will be slower than what we have seen in recent years."

Although the two did express hope for the year end, the admission of immediate downside risks paired with growing concerns of a U.S. recession erased the dollar's early support from the release of stronger U.S. data.

"Overall, what Bernanke has said is not too much out of whack with what he's said in the past, but markets are nonetheless a little nervous," said Win Thin, currency strategist at Brown Brothers Harriman in New York.

BBH analysts note that this is now the sixth consecutive session that the euro has held above the previous day's low. This means that "the euro's downside momentum from earlier this month [has] faded."

"That said, the euro has held below what we have identified as important resistance in the $1.4660 area," BBH added.

Late yesterday, the euro was at $1.4637, up from $1.4569 late Wednesday, while the dollar was at 107.98 yen, down from 108.27 yen. The euro was at 158.02 yen, up from 157.75 yen. The pound was at $1.9684, up from $1.9640, while the dollar was at 1.0982 Swiss francs, down from 1.1083 Swiss francs late Wednesday.

In his prepared comments, Mr. Bernanke kept the door open to further interest-rate reductions, saying downside risks to economic growth remain from housing, employment and credit markets. But, he said expectations are for a better year end and 2009, especially with the just-approved fiscal stimulus package.

The Federal Open Market Committee has lowered the fed-funds rate at which banks lend to each other by 225 basis points to 3% since September, including 125 basis points in reductions over an eight-day period in January.

Mr. Bernanke warned that credit conditions could tighten further and that consumers are in for a tough time in the coming months due to "softened" labor markets, higher energy costs, lower equity prices and falling home values.

The dollar also suffered vs. its rivals after Mr. Bernanke said he still sees systemic risks regarding government-sponsored enterprises, such as Fannie Mae and Freddie Mac.

Meanwhile, Axel Weber, a member of the European Central Bank's governing council, said yesterday that financial market participants' interest-rate expectations don't "adequately reflect" the risks surrounding the euro-zone's inflation outlook, which are "clearly to the upside."

The Dow Jones Industrial Average responded to the day with a 175.26- point fall. That placed further pressure on the greenback against the yen, as lower stocks tend to reduce risk appetite, which in turn boosts the Japanese currency and other low-yielders.

The morning had started out differently, though. The dollar had shot up to a one-month high against the yen to 108.62 yen and reduced its overnight losses against the euro following better-than-expected news on the U.S. trade deficit and weekly jobless claims.

The Commerce Department reported the U.S. trade gap narrowed by 6.9% in December despite record-high foreign oil prices. Another report showed the number of U.S. workers filing first-time jobless claims fell by 9,000 to 348,000 in the week ended Feb. 9.

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Dan Molinski contributed to this report.