Dollar Rises as Bernanke’s Bank Warning Spurs Demand for Safety

By Ye Xie

March 3 (Bloomberg) -- The dollar rose to the highest since April 2006 against the currencies of six major U.S. trading partners as Federal Reserve Chairman Ben S. Bernanke said the banking system isn’t yet stabilized, spurring demand for safety.

The U.S. currency also gained as an industry report showed pending home resales in the U.S. fell in January twice as much as economists forecast. The yen weakened against the Australian dollar after the nation’s Reserve Bank unexpectedly left its target lending rate unchanged for the first time in seven months, making some higher-yielding currencies more attractive.

“Safe-haven flows into dollars continue,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “We are seeing flows out of Japan into its neighbors where currencies are stable and yields are higher, such as Australia.” 

The dollar gained 0.3 percent to $1.2545 per euro at 11:49 a.m. in New York, from $1.2578 yesterday, after earlier dropping as much as 0.8 percent. The yen slid 0.5 percent to 123.22 per euro from 122.58. The dollar appreciated 0.8 percent to 98.21 yen from 97.45.

South Korea’s won advanced from near an 11-year low against the dollar on speculation policy makers intervened to stem the currency’s slump. It gained 1.2 percent to 1,552.15 per dollar after declining yesterday to 1,595.50, the weakest since 1997.
The Dollar Index, which the ICE uses to track the greenback versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, rose to 89.327, the strongest level since April 2006, as investors took refuge in the world’s reserve currency.

Bernanke on Banks 

Policy makers may need to expand aid to the banking system beyond the $700 billion already approved and take other measures even at the cost of soaring fiscal deficits, Bernanke said today in testimony prepared for the Senate Budget Committee.

An index of pending home resales decreased 7.7 percent in January after a 4.8 percent gain in the previous month, the National Association of Realtors reported today in Washington. The median forecast of 32 economists surveyed by Bloomberg News was for a 3.5 percent drop
The Standard & Poor’s 500 Index lost 0.9 percent after closing yesterday at the lowest level since October 1996.
Australia’s currency rose 3.2 percent to 63.36 yen after the Reserve Bank left the overnight cash target at 3.25 percent. Only four of 18 economists surveyed by Bloomberg News forecast the decision, with the rest expecting a cut of at least a quarter-percentage point. The Aussie advanced from a one-month low of 62.87 cents. New Zealand’s dollar added 1.2 percent to 48.58 yen.
Australia’s Economy

Some demand for higher-yielding currencies was also supported by speculation an Australian government report tomorrow will show the nation’s gross domestic product rose 0.2 percent last quarter from the prior three months.
“There are momentum traders buying the Aussie and the New Zealand dollar,” said Jack Spitz, managing director of foreign exchange at National Bank in Toronto.
Benchmark rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 3.5 percent in New Zealand.

The yen also slid today as public broadcaster NHK reported that Toyota Motor Corp., forecasting its first loss in 59 years, may seek about $2 billion in government loans.
Japan’s currency weakened 7.9 percent versus the dollar in February, its worst month since August 1995, on concern the deepening recession in Japan undermined the currency as a haven.
The yen is 16 percent “overvalued,” which “sits uncomfortably with the challenges facing the Japanese economy and the deterioration in the external balance,” wrote Fiona Lake, a Hong Kong-based analyst at Goldman Sachs Group Inc., in a research note today. “The headwinds facing the Japanese economy warrant an even weaker yen.” 

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
Last Updated: March 3, 2009 11:57 EST