FOREX-Dollar rebounds from three-week low after Bernanke remarks

Wed Jul 17, 2013 12:15pm EDT

Related Topics

* Bernanke: Fed tapering to begin this year but plan not pre-set

* Dollar edges higher vs euro, yen; bullish outlook seen intact

* Sterling rises after unanimous vote not to expand BoE bond buying

By Wanfeng Zhou

NEW YORK, July 17 (Reuters) - The dollar rose against the euro and the yen on Wednesday after Federal Reserve Chairman Ben Bernanke confirmed market expectations the U.S. central bank will start reducing stimulus this year as long as the economy grows as expected.

The dollar had earlier hit a three-week low against major currencies immediately after the release of Bernanke's prepared statement. Disappointing U.S. housing data also pressured the dollar, traders said.

The Fed chairman, in testimony to Congress, said the U.S. central bank still expects to start scaling back its massive bond purchase program later this year, but he left open the option of changing that plan if the economic outlook shifted.

Chris Tevere, currency strategist at Forex.com in New York, said Bernanke's comments are just "reiterating that tapering is going to be happening. It's just really more a matter of when is the timing of tapering."

The euro fell 0.5 percent to $1.3099, after earlier touching a session low at $1.3083, according to Reuters data. Initial support was cited at Monday's low of $1.2993.

The dollar rose as high as 99.93 yen and was last trading up 0.6 percent at 99.69 yen, still some way off this month's high of 101.53.

While sticking closely to a timeline he first outlined last month that the Fed would halt bond buying by mid-2014 when unemployment is projected to be around 7 percent, Bernanke went out of his way to stress that nothing was set in stone.

The market initially read Bernanke's comments as dovish, which drove the dollar and bond yields lower and sent equities higher. But the dollar rebounded as the reduction of Fed stimulus remains on the agenda this year, analysts said.

"Today's testimony reiterates as long as the economy remains on (its) current course for modest expansion, an autumn tapering of purchases would eventually lead to the termination of purchases by next year," said Ashraf Laidi, chief global strategist at City Index Ltd in London.

The dollar index , which tracks the greenback's performance against a basket of major currencies, rose 0.4 percent to 82.801, bouncing back after hitting a three-week low of 82.342.

Earlier on Wednesday, data showed U.S. housing starts and permits for future home construction unexpectedly fell in June, but the decline in activity was likely to be short-lived against the backdrop of bullish sentiment among homebuilders.

Analysts said the data-dependent nature of the Fed means the U.S. dollar could see periods of weakness.

"The fact that the Fed seems likely to taper stimulus this year should generally see the dollar hold an edge against its rivals. But the dollar would be susceptible to any downside surprises to data," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

Sterling, meanwhile, rallied to a two-week high of $1.5270, after minutes from the Bank of England meeting surprised markets when it showed all nine MPC members had voted against expanding its bond-buying program. It was last up 0.1 percent at $1.5177.

This wrong-footed investors who had built large bets against sterling in recent weeks expecting further signals on policy easing.

The Canadian dollar fell after the Bank of Canada said it will hold its benchmark interest rate steady at 1 percent while the economy remains fragile and inflation stays low. The U.S. currency last traded up 0.5 percent at C$1.0423.

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