Dollar Gains Against Euro as Bernanke Endorses Extra Stimulus

By Stanley White and Ye Xie

Oct. 21 (Bloomberg) -- The dollar rose for a fifth day against the euro after Federal Reserve Chairman Ben S. Bernanke endorsed additional fiscal stimulus to support the U.S. economy.

The greenback also gained for a third day versus the British pound after the White House said it's open to the idea of a new plan, fueling speculation policy makers will help the world's largest economy recover from a recession before the rest of the world. The yen may decline as a rally in global stocks encourages purchases of higher-yielding assets funded in the Japanese currency.

``An additional stimulus package will support the dollar,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``This shows that U.S. officials are prepared to go far to limit damage to the economy.''

The dollar rose to $1.3319 per euro as of 8:26 a.m. in Tokyo from $1.3344 late yesterday in New York. It touched $1.3259 on Oct. 10, the strongest since March 2007. Against the pound, the dollar gained to $1.7138 from $1.7152. The U.S. currency was little changed at 101.93 yen. The yen traded at 135.77 per euro from 135.92. The dollar may rise to $1.3285 today, Soma said.

Lawmakers ``should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,'' Bernanke said in testimony to the House Budget Committee yesterday. ``Such actions might be particularly effective at promoting economic growth and job creation,'' he told lawmakers.

Within an hour of the conclusion of Bernanke's testimony, White House Press Secretary Dana Perino said officials would ``look carefully'' at the suggestions.

Dollar's Rally

The dollar has gained 20 percent since touching a record low of $1.6038 per euro on July 15 on speculation the greenback will benefit as the European economy slows.

Traders expect the European Central Bank to lower borrowing costs further after cutting the main refinancing rate by half a percentage point to 3.75 percent on Oct. 8 as part of coordinated reductions by major central banks. The implied yield on the three-month Euribor contract expiring in March fell to 3.41 percent yesterday, the lowest level in seven months. The yield has been 0.23 percentage point higher than the benchmark rate on average over the past year.

The Fed will lower its 1.5 percent target lending rate by at least a quarter-percentage point when the central bank announces its next policy decision on Oct. 29, interest-rate futures indicated.

`More Room'

``The ECB has much more room to lower rates,'' said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. ``The Fed is ahead and proactive in easing rates. The rate expectations will kick into play, and the dollar should get supported.''

Investors see smaller price swings in major currencies on speculation credit market may be thawing after governments bailed out financial institutions and injected cash into the banking system.

Volatility on major currencies declined to 15.58 percent yesterday, from 16.97 percent on Oct. 17, according to a JPMorgan Chase & Co. index. The gauge touched 20.9 percent on Oct. 10, the highest since its inception in 1992.

``There's more hope that volatility will drift lower,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``People are still gun-shy.''

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars slid 36 basis points, or 0.36 percentage point, to 4.06 percent yesterday, the biggest drop in nine months, according to the British Bankers' Association.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.