Dollar Rises Before Bernanke’s Testimony on Fed’s Exit Strategy

By Ron Harui and Paul Dobson

Feb. 10 (Bloomberg) -- The dollar rose before the release of Federal Reserve Chairman Ben S. Bernanke’s testimony to Congress about withdrawing stimulus funds and on speculation U.S. reports will show the deficit shrank and retail sales rose.

The Australian and New Zealand dollars weakened after a Chinese report showed exports and imports fell in January from the previous month, damping demand for higher-yielding assets. The pound was near a three-week low against the euro on speculation the Bank of England will cut its economic-growth forecast in its quarterly report today.

“Some of the dollar recovery is linked to Bernanke’s text about the Fed’s thinking on policy exiting,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “The Chinese data was much weaker than expected and markets are taking that as a warning signal.”

The dollar advanced to $1.3754 per euro as of 8:15 a.m. in London from $1.3797 in New York yesterday. The U.S. currency traded at 89.68 yen from 89.69 yen. The yen rose to 123.40 per euro from 123.75, after earlier falling to 124.27, the lowest level since Feb. 4.

Bernanke’s testimony on the Fed’s exit strategy will be released at 10 a.m. in Washington. He was originally scheduled to speak before the House Financial Services Committee on “Unwinding Emergency Federal Liquidity Programs and Implications for Economic Recovery.” The hearing was postponed due to snow and hasn’t been rescheduled.

Trade Deficit

The U.S. trade deficit shrank to $35.8 billion in December from $36.4 billion the prior month, according to a Bloomberg News survey of economists. Retail sales rose 0.3 percent in January, after a 0.3 percent decline in December, a separate Bloomberg survey showed. The Commerce Department will release the trade report today. The department tentatively postponed the release of the retail sales report until Feb. 12.

The yen strengthened after China’s customs bureau reported exports declined a seasonally adjusted 5.5 percent last month from December, while imports dropped 0.9 percent.

“Both exports and imports fell, which could be perceived as a bad sign for China’s economic growth,” said Yuji Saito, director of the foreign-exchange department at Credit Agricole CIB in Tokyo. “This may cause risk aversion and buying of the yen and the dollar.”

The yen gained 0.4 percent to 78.49 per Australian dollar, and advanced 0.5 percent to 62.14 against New Zealand’s dollar. Australia’s dollar fell 0.4 percent to 87.51 U.S. cents, and New Zealand’s currency lost 0.5 percent to 69.30 cents. The Dollar Index, which tracks the U.S.’s currency against those of six major trading partners, rose 0.1 percent to 79.920.

Interest Rates

Benchmark interest rates of 3.75 percent in Australia and 2.5 percent in New Zealand compare with as low as zero in the U.S. and 0.1 percent in Japan, making the South Pacific nations’ assets attractive to investors seeking higher returns. The risk in such trades is that currency market moves will erase profits.

The yen typically strengthens in times of financial turmoil as Japan’s trade surplus makes the currency attractive as it means the nation does not have to rely on overseas lenders. The dollar benefits as the world’s main reserve currency.

The pound weakened against the dollar on speculation the Bank of England will lower its forecast of economic growth while raising its prediction for inflation.

U.K. Outlook

Gross domestic product in the U.K. rose 0.1 percent in the fourth quarter, the Office for National Statistics said last month. Consumer prices climbed 2.9 percent in December from a year earlier, the most since records began in 1997, according to government data.

“The BOE is likely to express a dovish view on the economic outlook even though it may upgrade its inflation forecast,” said Akane Vallery Uchida, a currency strategist at Royal Bank of Scotland Group Plc in Tokyo. “This report is unlikely to alter the recent downward trend for the pound.”

The U.K. currency declined to $1.5667 from $1.5719. The pound was 87.86 pence per euro from 87.77 pence yesterday, when it fell to 88.18 pence, the weakest level since Jan. 18.

The euro earlier rose against the yen on prospects the European Union will help Greece stem its budget crisis. German Finance Minister Wolfgang Schaeuble plans to brief lawmakers today on steps he may take to support the Greek government before the European Union holds a summit tomorrow.

“There was a suggestion from Germany in particular that they will come up with something to support Greece, and you’ve got a decent bounce in the euro,” said Phil Burke, chief dealer for global foreign exchange and rates at JPMorgan Chase & Co. in Sydney. “In Asia, currencies and equities will be supported on dips.”

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net