The dollar hit a record low versus the euro and reached a three-year nadir against the yen on Monday as investors expect low U.S. interest rates for some time to come, dulling the greenback’s attractiveness.
Federal Reserve Board Governor Ben Bernanke said in a speech on Sunday that the Fed is right to hold interest rates at 45-year lows even though the U.S. economy seems to have improved while keeping inflation low with productivity gains.
Bernanke said the risk of a “dollar crisis” was low. He added the effects of the dollar’s decline on inflation “appear to be relatively small” because foreign producers tend to absorb most of the impact of the dollar’s drop.
The prospect of interest rates remaining low is likely to encourage investment outflows from the dollar to higher-yielding currencies at a time when the United States needs capital inflows to cover its current account deficit.
“It’s fairly dovish,” said Greg Anderson, senior foreign exchange strategist at ABN Amro in Chicago, of Bernanke’s comments. “Keep in mind that he’s probably a little more dovish than most on the FOMC. The FX (foreign exchange) market right now is looking for some type of a signal to stop shorting the dollar. What he’s saying is the signal is going to be a long time in coming.”
The Federal Reserve’s Open Markets Committee is scheduled to meet to discuss interest rates in late January, and markets are forecasting U.S. rates to remain on hold at 1 percent.
“For now, I believe that the Federal Reserve has the luxury of being patient,” Bernanke told the American Economic Association in San Diego on Sunday.
In afternoon New York trading, the euro was up 0.71 percent at $1.2674 but down from the record high $1.2695 reached earlier, according to Reuters data.
“The dollar is not really trading off of fundamentals, which have been excellent in the United States. This is a momentum move, and until there is something to change the environment it is going all one way against the dollar,” said Mike King, a trader at Commerzbank in New York.
The dollar’s decline continues to fuel a rally in gold prices, lifting futures prices above $425 an ounce for the first time in 15 years.
The dollar fell 0.87 percent to 106.10 yen after trading at a new three-year low of 106.06 yen.
“It looks like the BoJ (Bank of Japan) lowered its threshold for where it is going to intervene from around 106.90 to 106. When the market sensed that, it just pushed the dollar toward that level,” said King.
Traders said Japanese and speculative names were selling dollars for yen, even though the market was wary of Japanese intervention after suspected yen-selling action in Asian trading hours.
Japan’s vice finance minister for international affairs, Zembei Mizoguchi, said on Monday Japan remained ready to step into the foreign exchange market if there were a danger of volatility.
The dollar dipped 0.50 percent at 1.2324 Swiss francs. Sterling gained 0.86 percent to $1.8078.
The U.S. economic release schedule featured little to move forex markets. U.S. November construction spending increased more than expected to a new record high, data showed.
Overall construction spending jumped 1.2 percent. But markets took little interest in the news.
Meanwhile, markets were also focusing on comments from policymakers about dollar weakness ahead of this weekend’s bimonthly meeting of central bankers at the Bank for International Settlements in Switzerland and next month’s meeting of finance ministers from the Group of Seven industrialized nations.
A G7 source has told Reuters the group will look at the weakened dollar at its Feb. 6 and 7 meeting. But analysts said key to the meeting would be the stance of Washington, which has so far kept mum on the weak dollar.