Dollar News

Dollar May Extend Gain on Bernanke's Comment, Crude Oil Decline

By Ye Xie and Candice Zachariahs

July 9 (Bloomberg) -- The dollar may rise against the euro for a second day after Federal Reserve Chairman Ben S. Bernanke said the central bank may extend its emergency-loan program for securities firms into next year and crude oil prices tumbled.

The U.S. currency advanced yesterday, erasing losses that came at the start of the week on concern Fannie Mae and Freddie Mac, the two largest mortgage finance companies, may need to raise additional capital.

``Bernanke is telling the market that the Fed will be there if there's any problem,'' said Joe Trevisani, chief market analyst in Saddle River, New Jersey, at FX Solutions LLC, a foreign-exchange brokerage. ``The Fed has calmed down the markets. If oil continues to come down, the dollar may strengthen further.''

Against the euro, the U.S. currency traded at $1.5665 at 6:37 a.m. in Tokyo, after rising 0.4 percent yesterday. The dollar traded at 107.43 yen, following a 0.3 percent increase. Japan's currency was at 168.30 per euro, after a 0.1 percent gain.

The dollar strengthened yesterday as Bernanke said in a speech in Arlington, Virginia, that the Fed is committed to financial stability and is ``considering several options, including extending the duration of our facilities for primary dealers'' beyond year-end.

``Markets are going through another bout of turbulence, and they're willing to act to counter those forces,'' said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, on Fed policy makers. ``That's where the support for the dollar is coming from.'' The firm is the world's largest custodial bank, with about $23 trillion in assets under administration.

Dollar's Decline

The Fed's Primary Dealer Credit Facility, which provides direct loans, and the Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, were created in March in response to the credit crisis. Both programs are aimed at the 20 primary dealers in U.S. government debt.

The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in the target lending rate, now 2 percent, to prevent the housing slump and credit losses from plunging the U.S. economy into a recession. The European Central Bank raised its main refinancing rate last week to a seven-year high of 4.25 percent.

Richmond Fed President Jeffrey Lacker told reporters in Washington yesterday that the weak dollar may fuel ``inflation pressures,'' echoing Bernanke's comments last month that policy makers are ``attentive'' to the effect of the dollar's decline. Lacker said in a speech yesterday that the central bank should consider raising interest rates to limit inflation as the threat of a steep economic slump begins to fade.

Crude Oil

Bernanke and U.S. Treasury Secretary Henry Paulson are scheduled to testify before Congress tomorrow.

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, yesterday increased as much as 0.6 percent to 73.082, the highest level since June 24.

Crude oil for August delivery fell for a second day, dropping more than 3 percent to $135.90 yesterday. It reached a record high of $145.85 a barrel on July 3. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

China's yuan appreciated 0.2 percent to 6.8511 per dollar, near the strongest since a dollar link ended in July 2005, on speculation the government will allow faster gains in the currency to help curb inflation.

The U.S. currency fell 0.1 percent against the euro on July 7 as a report from Lehman Brothers Holdings Inc. said Fannie and Freddie may need to raise a total of $75 billion because of an accounting change. They have enough capital to survive the housing slump and meet new accounting rules, James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, told Bloomberg Television yesterday.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.

Last Updated: July 8, 2008 17:42 EDT