Dollar Climbs Versus High-Yielding Currencies Before Bernanke

By Gavin Finch

July 21 (Bloomberg) -- The dollar rose against higher- yielding currencies on speculation Federal Reserve Chairman Ben S. Bernanke may present to Congress a plan for preventing inflation as the economy begins to recover.

The U.S. currency advanced against the South African rand and the Australian and New Zealand dollars after Bernanke said in an opinion article in the Wall Street Journal that the Fed is confident it has “the necessary tools to withdraw policy accommodation when that becomes appropriate.” The dollar pared gains as stocks rose, sapping demand for relative safety.

“By setting out how the Fed is going to exit its program of asset purchases and keep a lid on inflation, Bernanke is removing some of the negatives for the dollar,” said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The focus now will be on what Bernanke says later today and whether he mentions a timescale.”

The dollar advanced 0.8 percent to 7.8920 rand at 7:23 a.m. in New York, from 7.8294 yesterday. Against the Australian dollar, the greenback climbed 0.5 percent to 81.30 U.S. cents, while it strengthened 0.6 percent to 65.40 cents versus the New Zealand dollar.

Benchmark interest rates of 2.5 percent in New Zealand, 3 percent in Australia and 7.5 percent in South Africa compare with 0.1 percent in Japan and as a low as zero in the U.S.

The dollar advanced 0.2 percent to $1.4205 per euro after reaching $1.4249 yesterday, the weakest level since June 5. It was little changed at 94.23 yen. The Japanese currency appreciated 0.1 percent to 133.86 per euro.

‘Accommodative Policies’

The Fed will maintain “accommodative policies” aimed at reviving the U.S. economy for an “extended period,” including holding its benchmark interest rate near zero, Bernanke wrote in the Wall Street Journal.

Bernanke outlined five ways the central bank will be able to prevent the record reserves that banks have accumulated from causing money supply and inflation to surge. Officials will use the interest rate on banks’ deposits with the Fed as a main tool, which they can supplement with other means, including reverse-repurchase agreements and term deposits, he wrote.

“As economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road,” Bernanke wrote.

He will deliver his semiannual report to the House Financial Services Committee starting at 10 a.m. in Washington.

Stock Gains

European stocks advanced for a seventh day, the longest run of gains since August 2007, driving the Dow Jones Stoxx 600 Index up 0.6 percent.

The dollar and yen may struggle to gain should earnings from companies including Morgan Stanley, Microsoft Corp. and Apple Inc. beat analysts’ expectations, according to RBC Capital Markets.

“A continuation of the general trend of upside surprises seen in last week’s earnings reports would keep the dollar and yen under pressure,” Adam Cole, global head of currency strategy at RBC in London, wrote in a report. “The major macro event risk for the markets” will be Bernanke’s congressional testimony, he wrote.

The yen typically rises during times of financial turmoil because Japan’s trade surplus means the nation doesn’t have to rely on overseas lenders. The dollar tends to benefit from its status as the world’s main reserve currency.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net