Dollar Trades Near One-Month Low as Bernanke, Paulson Testify

By Ye Xie and Daniel Kruger

Sept. 23 (Bloomberg) -- The dollar traded near a one-month low against the euro as Federal Reserve Chairman Ben S. Bernanke said in the text of his Senate testimony that failure to pass the U.S. financial bailout would threaten the economy.

``The sooner we get a plan in place -- we can worry about the details later -- the sooner we can reduce uncertainty,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets under administration.

The dollar traded at $1.4767 per euro at 9:41 a.m. in New York, compared with $1.4774 yesterday, when it dropped 2.1 percent and touched $1.4866, the weakest level since Aug. 22. It was little changed at 105.49 yen, compared with 105.51 yen. The euro was at 155.80 yen, compared with 155.91.

Treasury Secretary Henry Paulson and Bernanke provided the Senate Banking Committee with details today on the $700 billion proposal to buy troubled assets from banks to shore up the financial system.

The bailout plan proposes buying devalued securities from financial institutions that economists estimate would drive U.S. government debt above 70 percent of gross domestic product and the annual budget gap to an all-time high next year. Bernanke said in a copy of his testimony that global financial markets remain under ``extraordinary'' stress.

South Africa's rand fell was the biggest loser against the dollar among the world's most-active currencies after Finance Minister Trevor Manuel resigned, fueling concern the country's new leaders will boost spending and allow record inflation to accelerate. The rand dropped 2 percent to 8.1469 against the dollar and 1.8 percent to 12.0170 versus the euro.

Crude Oil Declines

The U.S. currency rose earlier versus the euro as crude oil fell and investors speculated the greenback's biggest decline since January 2001 yesterday was too big to sustain.

Crude oil for November delivery dropped as much as 3 percent to $106.07 a barrel in electronic trading on the New York Mercantile Exchange. The October oil futures contract, which expired yesterday, had climbed by a record $16 a barrel to the highest since Aug. 21 as traders unwound positions.

The euro-dollar exchange rate and oil have had a correlation of 0.8 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

Europe's currency also weakened as Royal Bank of Scotland Group Plc's composite index fell more than expected to 47 this month, from 48.2 in August. The median forecast of 21 economists surveyed by Bloomberg News was for a reading of 47.8. The index is based on a survey of purchasing managers by Markit Economics in London. A reading below 50 indicates contraction.

European `Weakness'

``Economic data in Europe remind people there's more weakness coming,'' said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. ``It's going to provide longer-term support for the dollar, but right now all focus is on the bailout plan.''

Short-term pressure on the U.S. dollar will subside as the government's efforts to prevent a prolonged recession support the currency as the global economy slows, wrote Morgan Stanley currency strategist Stephen Jen in a note.

While U.S. interest rates may rise as the Treasury sells debt to fund its purchase of soured mortgages and other tainted loans on bank balance sheets, much of that may be recouped, mitigating the risk to the currency, Jen wrote yesterday.

``The idea that the dollar is going to be debased by this is amusing,'' said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc., in an interview on Bloomberg Television. ``If this plan gets through, once more sober heads start to think about it, for the people that claim they wanted to buy the dollar around three weeks ago when it was going crazy, you're getting another chance here.''

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net