Dollar Gaints As Bernanke Cites Economic Hurdles

NEW YORK (MarketWatch) — The dollar strengthened Tuesday as Federal Reserve Chairman Ben Bernanke highlighted obstacles to a U.S. recovery and euro-zone debt concerns, prompting a selloff in stocks and raising the value of the greenback as a safe haven.

The dollar index /quotes/zigman/1652083 DXY -0.07% , which measures the performance of the U.S. unit against a basket of six other major currencies, rose against a basket of rivals to 74.791 from 74.553 late Tuesday, picking up strength as Bernanke briefed reporters following the Fed’s monetary-policy statement and economic forecast.

“Bernanke seemed to be focused on the persistent headwinds to a U.S. recovery,” said David Watt, senior currency strategist at RBC Capital Markets. “This got the market cautious about the U.S. economic outlook.”

“As he spoke, equities faded, and the dollar rallied,” Watts said, adding that the dollar exhibited the strongest moves when Bernanke focused on the uncertainty of the recovery and the strains on the European Union.

Bernanke said there was “uncertainty” about how much of the recent U.S. slowdown was permanent or transitory. He also said that while U.S. banks’ direct exposure to Greece was small, a disorderly sovereign bond default would likely roil financial markets and have a “significant” impact on the United States.

The euro /quotes/zigman/4867933/sampled EURUSD -0.27% was last trading at $1.4360, up from $1.4305 late Tuesday but off session highs of $1.4441 . See real-time currency quotes and tools.

U.S. stocks, which had been trading near flat ahead of the afternoon press conference, ended with broad losses. The Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA -0.66% fell 80 points to 12,110, with all but two stocks lower. Read more on U.S. stocks.

The dollar’s rise during Bernanke’s appearance continued its upward movement through the day. The dollar index rose to 74.677 after the Federal Reserve released its statement on monetary policy Tuesday afternoon.

The Federal Open Market Committee kept interest rates near 0% and said, as expected, that it was ending its $600 billion bond-buying program on schedule by the end of this month. The decision was unanimous.

“The absence of a dissent for a third meeting sends a strong message to financial markets that the Fed is committed to zero interest rates for the foreseeable future,” said Michael Woolfolk, currency strategist at BNY Mellon Global Markets. But also, Woolfolk said, the committee gave no sign it was extending or embarking on a new quantitative easing program.

“Quantitative easing appears to be dead and buried, may it rest in peace,” he wrote.

Watts said that Bernanke had appeared to offer mixed signals.
“While he said there was no more quantitative easing in the pipeline, he didn’t go out of way to show that there might not be no possibility,” said Watts, “It is a confusing hash.”

Low interest rates put a currency at a disadvantage. And for the past two years, the Fed has taken a step beyond reducing its benchmark rate to historic lows by buying bonds from the private sector. This extra monetary stimulus, known as quantitative easing, has contributed to the dollar’s 16% drop in the last year.