bernanke says economic outlook is `positive'

Dollar Rises as Bernanke Says Economic Outlook Is `Positive'

March 21 (Bloomberg) -- The dollar climbed against the yen after Federal Reserve Chairman Ben S. Bernanke said the outlook for the U.S. economy is ``positive,'' suggesting interest rates will rise further.

Falling long-term bond yields don't signal a slowdown and reflect investors' confidence in low inflation and stable growth, Bernanke said late yesterday in a speech in New York. Traders lifted bets the Fed will raise borrowing costs at least twice more, reversing last week's drop in rate expectations that sent the dollar to its biggest loss in two months.

``Bernanke sounded quite hawkish,'' said Niels Christensen, a currency strategist at Societe Generale SA in Paris. ``The market thinks higher rates will continue to support the dollar for a bit longer.''

The dollar traded at 116.75 yen at 10:06 a.m. in London, from 116.39 late yesterday in New York. It was also at $1.2149 per euro from $1.2164. Trading was less than usual because of a national holiday in Japan.

The Fed has lifted rates at every meeting since June 2004, to 4.5 percent, while the ECB raised its benchmark for the second time in three months to 2.5 percent on March 2. The Bank of Japan has kept rates near zero percent for five years.

In a speech yesterday to the Economic Club of New York, Bernanke said he doesn't interpret the narrowing gap between short-and long-term rates as ``indicating a significant economic slowdown to come'' and may instead reflect investors' confidence in the economy.

Bond Yields

Today's yield on U.S. 10-year bonds of 4.68 percent matched the two-year note yield. Long-term yields are typically higher than those on shorter maturities to compensate investors for the extra risk of waiting for repayment.

Short-term rates exceeded long-term yields on U.S. Treasuries in December for the first time in five years in December, creating a so-called inverted yield curve. The phenomenon has preceded the past four recessions.

Because investors may be willing to accept less risk due to stable inflation, ``the implications for future economic activity are positive rather than negative,'' Bernanke said.

Interest-rate futures show traders are certain the Fed will raise rates to 4.75 percent at its meeting on March 28, and the chances of another increase to 5 percent in May increased to 82 percent from 73 percent at the end of last week after Bernanke's speech, the last before Fed policy makers meet next week.

`Support the Dollar'

``We did not see anything in Bernanke's speech that would make us change our view of Fed rate increases to 5 percent,'' said Sean Callow, a currency strategist in Singapore at Westpac Banking Corp. ``Interest-rate hikes are not yet over in the U.S. It's likely to support the dollar, especially against the euro.''

The dollar may strengthen to $1.20 versus the euro and 117.50 yen this week, Callow said.

Gains for the dollar may be limited as a report today is expected to show producer prices, a gauge of inflation, fell for the first time in three months.

Prices paid to factories, farmers and other producers last month decreased 0.2 percent, according to a Bloomberg survey of economists. The Labor Department releases the report at 8:30 a.m. in Washington.

The dollar's advance against the yen may also be curbed by speculation the U.S. will put pressure on China to allow its currency to strengthen faster as Senators Lindsey Graham and Charles Schumer yesterday arrived in Beijing to meet Chinese officials.

China Pressure

China's yuan yesterday rose to the strongest since the currency's peg to the dollar was scrapped in July. A stronger yuan makes China's exports more expensive relative to rival products from Japan and increases China's buying power for Japanese goods.

``The currency will continue to appreciate at a gradual pace,'' said Marios Maratheftis, a currency strategist at Standard Chartered Plc in London. ``We don't believe China will get rid of its gradualist approach.''

The yuan fell today by the most in two weeks on speculation the central bank will temper gains after the currency's advance yesterday. Graham today reiterated that recent gains in the yuan are ``encouraging'' and said a free-floating currency is China's best option.

Losses for the yen may stall on speculation Japan's central bank will raise rates later this year. The world's second-largest economy will probably follow a ``gradualist'' approach toward ending its policy of holding rates almost at zero percent to fight deflation, board member Atsushi Mizuno said yesterday in a speech to the Japan America Society of Chicago.

The Bank of Japan on March 9 decided to reduce the amount of money it makes available to lenders, a step toward raising borrowing costs that have been kept near zero percent since 2001.



To contact the reporter on this story:
Kabir Chibber in London at [email protected];
Chris Young in Sydney at [email protected].
Last Updated: March 21, 2006 05:09 EST

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