Dr. P.V. Viswanath



Economics/Finance on the Web
Student Interest


Dollar Climbs, Japan's Minister Cautions on Rates


WSJ, June 7, 2006

The dollar moved broadly higher, advancing versus its major counterparts as investors focused on comments from Federal Reserve officials highlighting the possibility of further U.S. rate increases.

From its peak for the day, the euro fell more than a cent versus the dollar, while the dollar posted a gain of 1.5 yen versus its Japanese counterpart.

The dollar owes its strength to comments from Fed officials that have outlined a concern over inflation and resuscitated waning expectations that the Fed might raise interest rates.

Late in New York, the euro was at $1.2838 from $1.2914 late Monday. The dollar was at 113.22 yen from 112.17 yen late Monday. The euro was at 145.21 yen from 144.85 yen, and the dollar was quoted at 1.2148 Swiss francs from 1.2071 francs late Monday. Sterling was at $1.8614 from $1.8726. Indeed, the July federal-fund futures contract is pricing in an 80% chance of a rate increase this month, compared with 50% Friday. The prospect of higher interest rates tends to support the dollar as it makes dollar-denominated assets more attractive.

With little data to move markets, the dollar continued to respond to Fed Chairman Ben Bernanke's comments Monday in Washington as well as remarks from St. Louis Fed President William Poole.

Meanwhile, Japan's finance minister urged the central bank to be cautious in setting monetary policy, saying it shouldn't increase interest rates sharply because there is still deflation.

Sadakazu Tanigaki also said in an interview that there is a "misunderstanding" that the Group of Seven leading industrial nations (which includes Japan) have endorsed a weaker dollar. To the contrary, he said, G-7 nations "broadly agree" on the need to take action in the foreign-exchange market when currency moves aren't in line with economic fundamentals.

Yesterday's "move was fallout from Monday's meeting, where Bernanke came out and was far more hawkish than people expected," said Tim O'Sullivan, chief trader at Gain Capital in Bedminster, N.J.

Additionally, Mr. O'Sullivan noted that comments from European Central Bank President Jean-Claude Trichet were far more benign than the market had expected, particularly given the widely expected interest-rate increase anticipated by the central bank tomorrow.




  1. Why did the dollar climb?