Dollar Drops Versus Euro, Yen as Bush Nominates Bernanke for Fed
Chairman
Oct. 24 (Bloomberg) -- The dollar fell against the euro and the yen after President George W. Bush
nominated Ben Bernanke to succeed Alan Greenspan as Federal Reserve chairman. Bernanke may be
less aggressive in raising interest rates than Greenspan, said analysts including David Woo, head of
currency strategy in London at Barclays Capital Inc. The USD is up 13 percent versus both the EUR
and the JPY this year as the Fed raised its benchmark rate six times. “Bernanke is bearish for the U.S.
dollar because he is likely to be perceived as more dovish on interest rates,” said Woo. “The market
may sell some dollars until he's officially appointed.”
The dollar weakened to USD 1.1986 per euro from 1.1953 USD/EUR on Oct. 21 at 5 p.m. in New
York, according to electronic foreign- exchange dealing system EBS. The U.S. currency dropped to
JPY 115.45 from JPY 115.90.
A Fed governor from August 2002 to June 2005, Bernanke during his first year raised concern in
speeches about the possibility of deflation, or broad price declines that hurt economic growth. The Fed
cut its target for the overnight lending rate between banks to a 45-year low of 1 percent in June 2003 to
help avoid that possibility.
“Bernanke is something of a known dove,” said Richard Franulovich, a New York-based currency
strategist at Westpac Banking Corp. “He was the intellectual powerhouse behind the deflation concern.
He was the one who was most concerned about it” in 2003, he said.
Dollar Bullish
The U.S. currency pared some of its declines after Bernanke said his “first priority” is to maintain
“policies and policy strategies of the Greenspan years.” Investors viewed that as a signal he will retain
the Fed's policy of “measured” interest- rate increases.
“If Bernanke comes in and raises rates at the first meeting, that would be dollar bullish,” said T.J.
Marta, senior currency strategist at RBC Capital Markets in New York. “It would be very hard
politically for Bernanke to stop raising rates. They'll want to fire a shot over the bow that nothing has
changed and the institution is still intact.”
The USD fell 2.2 percent versus the JPY on June 2 1987, the day President Ronald Reagan named
Greenspan to replace Paul Volcker. It recovered more than half of that loss during the following two
days, according to Bloomberg data. The USD lost 1.6 percent versus the deutsche mark the day
Greenspan was named, and half the loss was recouped the following two trading days.
Nowhere Near
Today's decline will be “nowhere near” the same magnitude as it was after Greenspan was nominated,
said Monica Fan, head of global currency strategy at RBC Capital Markets Ltd. in London.
Bernanke, 51, is chairman of the Council of Economic Advisers. Greenspan's non-renewable term ends
on Jan. 31. The Fed has raised its benchmark rate 11 times since June 2004 to 3.75 percent.
Last week Bernanke said the U.S. economy is showing signs of inflation driven largely by higher
energy costs, an acceleration that pinches consumers and businesses even though other trends remain
consistent with “overall price stability.”
The USD earlier fell the most in more than two weeks against the JPY after an adviser to the People's
Bank of China said a stronger Chinese currency is “inevitable.”
The yen also gained versus the euro after the remarks by Yu Yongding, an advisory member of the
central bank's monetary policy committee, to a conference in Tokyo. A stronger yuan may make the
country's exports less competitive relative to products made elsewhere in Asia, including Japan. The
yen's gains came as speculators had the most bets on a drop in more than six years.
'Stronger' Yen
“The yen should get stronger on the back of these comments, especially since a lot of players are way
short yen,” said Chris Melendez, president of currency hedge fund Tempest Asset Management in
Laguna Beach, California.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the
JPY compared with those on a gain -- so-called net shorts -- was 66,641 on Oct. 18, up from 66,035 a
week earlier, the Commodity Futures Trading Commission said on Oct. 21.
Fifty-four percent of the 59 traders, strategists and investors surveyed Oct. 21 from Sydney to New
York advised selling the JPY against the USD, compared with 27 percent who recommended buying.
More participants said they would sell the JPY versus the EUR than purchase Japan's currency.