Dollar Rises as Bernanke Says Fed Set to Tighten Upon Recovery

By Yoshiaki Nohara and Ron Harui

Oct. 9 (Bloomberg) -- The dollar rose the most in two months against the yen after Federal Reserve Chairman Ben S. Bernanke said the bank is ready to tighten monetary policy once the economy improves, increasing the appeal of U.S. assets.

The yen dropped against all 16 of its most-traded counterparts after Japan’s machinery orders gained less than forecast, adding to signs its recovery will trail that of other economies. The Australian dollar headed for its biggest weekly gain since May amid wagers the central bank will raise interest rates twice more this year after a surprise increase on Oct. 6.

“Bernanke is shifting to a hawkish tone in terms of the timing of exit strategy following moves by other central banks, especially the Reserve Bank of Australia,” said Takeshi Tokita, vice president of foreign exchange sales at Mizuho Corporate Bank Ltd. in Tokyo. “That’s benefiting the dollar.”

The U.S. currency climbed 0.9 percent, set for the steepest daily gain since Aug. 7, to 89.17 yen as of 6:01 a.m. in London from 88.39 yen in New York yesterday. That trimmed the dollar’s loss this week to 0.7 percent. The greenback rose to $1.4735 per euro from $1.4794, paring a 1.1 percent decline on the week. Japan’s currency dropped to 131.37 per euro from 130.76. It has weakened 0.4 percent on the week.

Australia’s dollar traded at 90.48 U.S. cents from 90.61 cents in New York yesterday, when it touched 90.90 cents, the strongest level since Aug. 7, 2008.

The U.S. dollar gained against 15 of its 16 major counterparts after Bernanke said in prepared remarks at a conference in Washington “when the economic outlook has improved sufficiently, we will be prepared to tighten.”

Bernanke’s comments echoed those by Kansas City Fed President Thomas Hoenig, who on Oct. 6 said raising interest rates wouldn’t derail the U.S. economic recovery.

‘Incremental Increases’

“Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy,” Hoenig said in Denver. “I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later.”

White House economic adviser Lawrence Summers repeated the administration’s commitment to a strong dollar, citing recent comments by U.S. Treasury Secretary Timothy Geithner.

“He made it very clear that our commitment is to a strong dollar based on strong fundamentals,” Summers said at a forum in New York organized by Bloomberg LP, the parent of Bloomberg News.

The yen dropped as Japan’s machinery orders rose 0.5 percent in August after falling 9.3 percent in July, the Cabinet Office reported in Tokyo. The median estimate of 27 economists in a Bloomberg News survey called for a 2.1 percent gain.

‘Momentum Trading’

“The data adds to speculation Japan will be the last to recover,” said Toshiya Yamauchi, a Tokyo-based manager of the foreign-exchange margin trading department at Ueda Harlow Ltd. “As other nations lead the global economic recovery, the yen will likely be sold as a funding currency.”

Japan’s currency is likely to weaken over the next 12 months as “momentum” fades from a tax break on overseas earnings, according to Brown Brothers Harriman & Co. Since April 1, Japanese exporters have been able to bring back income earned outside the country without paying the combined 40 percent tax.

“It’s largely momentum trading right now and we’re pushing it because we haven’t reached a pain threshold of anything to stop us,” said Marc Chandler, global head of currency strategy at Brown Brothers in New York. “The reason the Japanese stock market underperforms despite having a strong yen is precisely because they have a strong yen. It’s eroding corporate profits.”

Australia’s Rates

Japan’s currency will probably fall to between 105 and 110 versus the dollar in the next 12 months, Chandler predicted.

Australia’s currency has gained 4.6 percent this week versus its U.S. counterpart, the most since the five days ended May 8. Investors are certain the Reserve Bank of Australia will raise the overnight cash rate target on Nov. 3 by a quarter percentage point, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

They’re wagering on a 96 percent chance he follows with another increase in December to end the year with a cash rate at 3.75 percent.

“The central bank will probably hike rates twice more this year as fundamentals such as employment seem to be improving,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “High- yielding currencies such as the Aussie dollar will likely be bought more. Risk-taking appetite is high.”

‘Appropriate’ Rates

The number of people employed increased 40,600 in September from August 2008, the statistics bureau said in Sydney yesterday. The median estimate of 20 economists surveyed by Bloomberg was for a decline of 10,000. The unemployment rate fell to 5.7 percent from 5.8 percent.

The euro advanced against the yen after European Central Bank President Jean-Claude Trichet said yesterday the region’s economy is emerging from a period of “free fall,” damping demand for Japan’s currency as a refuge.

Trichet signaled the ECB will keep interest rates at a record low to spur growth.

“The current rates remain appropriate,” Trichet said at a press conference in Venice after policy makers left the main refinancing rate at 1 percent. “Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” he said, reiterating the Group of Seven’s statement on currencies.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.