Dollar Is Little Changed Before Bernanke, Paulson Testimony

By Stanley White and Kosuke Goto

July 10 (Bloomberg) -- The dollar was little changed against the euro before Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson address U.S. lawmakers on their response to widening credit-market losses.

The U.S. dollar fell against Australia's currency as traders increased bets the Fed will keep interest rates on hold through 2008, boosting the appeal of higher-yielding assets. The British pound declined on speculation the Bank of England will keep interest rates unchanged today to curb inflation, increasing the risk that the economy will enter a recession.

``Bernanke may mention the downside risk of the U.S. economy,'' said Masafumi Yamamoto, head of foreign-exchange strategy in Tokyo at Royal Bank of Scotland Group Plc, the world's fifth-largest currency trader. ``That would reduce expectations of the Fed's rate increases this year and be a catalyst for dollar-selling.''

The dollar traded at $1.5725 per euro at 12:38 p.m. in Tokyo from $1.5743 yesterday in New York. The U.S. currency bought 106.87 yen from 106.76. The yen was at 168.04 per euro from 168.06.

The pound fell to $1.9815 from $1.9832. Against the euro, it was little changed at 79.36 pence.

The Australian dollar rose to 95.90 U.S. cents from 95.70 cents after data showed employment climbed by 29,800 in June, more than the median estimate in a Bloomberg News survey. The currency also advanced to 102.51 yen from 102.16 on speculation the Reserve Bank of Australia will keep interest rates at 7.25 percent this year, compared with benchmark rates of 0.5 percent in Japan and 2 percent in the U.S.

Congressional Testimony

Bernanke and Paulson are scheduled to testify before Congress at 10 a.m. in Washington. The Fed may extend securities dealers' access to direct loans from the central bank into next year, the central bank head said on July 8, as the collapse of the U.S. subprime mortgage market made banks reluctant to lend.

The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in its target lending rate to avert a recession. Futures contracts on the Chicago Board of Trade show the odds that policy makers will keep borrowing costs unchanged this year rose to 32 percent from 7 percent a month ago.

Fannie Mae, one of the two-largest U.S. mortgage finance companies, said it sold $3 billion of two-year debt yesterday at record yield spreads over benchmark rates on concern that the company doesn't have enough capital to see out the credit crunch.

Dollar Selling

Global banks and securities firms have reported losses of more than $400 billion as the subprime mortgage market collapsed.

``Fannie Mae could be the catalyst for further dollar declines,'' said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co., a unit of Japan's largest brokerage. ``The U.S. financial sector isn't healthy. Things are likely to get worse, and that isn't fully reflected in the value of the dollar.''

The U.S. currency may fall to $1.58 per euro and 106 yen today, he forecast.

U.K. inflation accelerated to the fastest pace in more than a decade in May, making it harder for the BOE to cut rates. The central bank will leave the key rate at 5 percent today, according to all but one of the 49 economists in a Bloomberg survey before the decision at noon in London.

``We remain short in pound-dollar,'' BNP Paribas SA analysts led by Hans-Guenter Redeker wrote in a research note yesterday. ``Inflation should continue to push higher in the near term while the growth outlook continues to deteriorate.''

ECB on Inflation

A short is a bet a currency will fall. Investors should sell the pound as long as it is below $1.9890 with a target of $1.95, according to the report.

European Central Bank President Jean-Claude Trichet told the European Parliament in Strasbourg, France, yesterday that the level of inflation is ``worrying.'' He also said it's important for the U.S. to repeat support for a strong currency.

Traders yesterday increased bets the ECB will raise borrowing costs again to curtail 4 percent annual inflation that is twice the central bank's 2 percent target. The implied rate on the December Euribor interest-rate futures contract rose 0.02 percentage point to 5.12 percent.

``The ECB will have no choice but to raise rates later on this fall,'' Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, said in an interview with Bloomberg Television. ``You'll see the euro-dollar break back above $1.60.''

Technical Analysis

The euro may rise to $1.5909 against the dollar should it stay above its five-day moving average, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd.

The five-day moving average, currently at $1.5715, will provide a level of so-called support for the euro, Tokyo-based Hashimoto said, citing technical charts traders use to predict price movements. The target of $1.5909 will match a two-month high set by Europe's single currency on July 3. Support is an area where buy orders may be clustered.

``Should the euro break through its five-day moving average completely, it will likely challenge its July 3 high,'' said Hashimoto at the unit of Japan's largest publicly traded financial group.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net