* Investors brace for Friday speech by Fed's Bernanke
* Dollar could gain if Bernanke does not signal QE3
(Updates prices, adds comment, details, changes byline)
By Steven C. Johnson
NEW YORK, Aug 25 The dollar rose on Thursday
and stocks slumped as investors shied away from risky trades
amid speculation that Federal Reserve chief Ben Bernanke will
not hint at new plans to stimulate the economy this week.
Talk that Germany might follow other European countries by
banning short-selling also pushed the euro lower, erasing gains
seen after news that Berkshire Hathaway (BRKa.N) would invest
$5 billion in Bank of America (BAC.N). For more see
Though a German Finance Ministry spokesman said there were
no plans to ban short-selling, the damage to European stocks
had been done, and that rippled through U.S. markets.
The dollar tends to rise when markets grow nervous because
investors cut trades funded with the U.S. currency. Low U.S.
interest rates let investors borrow dollars at almost no cost.
Fading expectations of more Fed easing -- markets came into
the week thinking Bernanke could announce a third round of
asset purchases or some other extraordinary policy when he
speaks on Friday in Jackson Hole, Wyoming -- are also good for
the dollar and bad for stocks and risk appetite.
Under quantitative easing, the Fed prints money to buy
bonds, which should depress U.S. Treasury yields and encourage
investors to seek higher returns elsewhere. An increase in the
money supply erodes the value of the dollar.
"We spent the better part of this week pricing in a QE3
announcement. Now we're seeing some give-back. and the more QE3
is priced out, the more the dollar will strengthen," said Brian
Dolan, chief strategist at Forex.com in Bedminster, New
If the Fed does refrain from injecting more dollars into
the system, Dolan said the currency could extend gains sharply
as investors pull out of stocks and other risky assets. A euro
slide below $1.4250 could speed up greenback gains, he said.
The euro fell 0.2 percent to $1.4380 EUR=, though it
recovered from a global session low of $1.4325.
The dollar rose to 77.48 yen JPY=, up 0.7 percent. It hit
a record low beneath 76 yen last week. The dollar also hit a
one-week high just shy of 0.8000 Swiss francs before easing to
0.7932 francs, down 0.3 percent CHF=EBS.
The dollar could rack up more gains against both currencies
if Bernanke holds off on QE3, said Boris Schlossberg, director
of currency research at GFT in New York.
"Should that scenario turn out to be true, the greenback
could climb to 78.00 yen and could finally retake the 0.80
barrier against the Swissie as fears of further dilution of the
currency begin to dissipate," he said.
Some analysts still think Bernanke may signal the Fed is
ready to act if necessary, which could help riskier currencies
including the Australian and New Zealand dollars.
Handicapping the euro's next moves is tougher: Investors
shrugged off a surge in Greek bond yields GR2YT=TWEB, which
rose on fear a planned second Greek bailout may yet unravel.
But analysts said market focus will return to Europe's debt
crisis after Bernanke's speech.
Fed data showed the U.S. central bank conducted $500
million of currency swaps with the European Central Bank in the
week ended Aug. 24, suggesting some strains in short-term
funding markets. [ID:nN1E77O1N0]
Some European banks have had to pay more to fund short-term
U.S. operations lately due to fear they may be exposed to debt
from troubled euro zone countries. [ID:nN1E77O18R]
Yet some traders said Chinese demand for euros will cap the
currency's losses. [ID:nB9E7J201Z]
"China has not wavered in its support of the euro and the
euro zone," said Douglas Borthwick, managing director at Faros
Trading in Stamford, Connecticut. "We believe China, other
Asian central banks and Middle Eastern reserve managers'
euro/dollar purchases will continue at a gradual pace."
(Additional reporting by Wanfeng Zhou; Editing by James
Dalgleish and Leslie Adler)