Dollar feels weight of rate talk

The dollar suffered against the euro this week after comments from Ben Bernanke, chairman of the Federal Reserve, cemented expectations for further cuts in US interest rates.

In testimony before US Congress on Thursday, Mr Bernanke reiterated the downside risks to US economic growth and said the Fed stood ready to take action in response, underlining the central bank’s willingness to loosen US monetary policy further.

Mr Bernanke said a significant worsening in financial conditions or in credit availability “would certainly be a warning bell that we need to take further action”.

But Mr Bernanke also said he expected a stronger pace of US growth to start later this year as the effects of recent monetary and fiscal stimuli began to be felt.

Ashley Davies at UBS said he believed the dollar would likely benefit in the longer run, although currency markets chose to focus on the prospects for imminent rate cuts rather than a US recovery in the short term.

“With downside risks to growth in the US already largely priced into the dollar, but eurozone data deteriorating and therefore justifying monetary easing, we look for euro/dollar to trade down to $1.43 over the next three months,” he said.

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