NEW YORK The dollar fell to an eight-week low against the euro and two-week low against the yen on Friday after Federal Reserve Chairman Ben Bernanke said high unemployment is "a grave concern," reinforcing expectations for further monetary easing to revive growth.
Bernanke, speaking at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, said the U.S. economy faced "daunting" challenges and that the Fed would act as needed to strengthen the recovery. But he did not explicitly signal an imminent move.
The dollar had briefly pared losses against the euro and yen immediately after Bernanke spoke as he disappointed some investors, who had hoped for a clear signal of near-term easing, before resuming declines to hit session lows.
"The only thing that sticks out is the 'grave' concern about the labor market, which is a little stronger than the language used in the past," said Win Thin, global head of emerging market strategy at Brown Brother Harriman in New York. "That will make next week's payrolls report even more important."
The August payrolls report is due next Friday, days before the next Federal Open Market Committee, which meets on September 12-13. Many analysts reckon there's a strong possibility the Fed will announce a third round of bond-buying at the meeting.
The euro rose as high as $1.2636 on Reuters data, the strongest since early July, and was last up 0.6 percent at $1.2578.
Hopes for near-term action had grown since Fed meeting minutes last week showed policymakers could act "fairly soon," but investors have since pared back expectations that a new round of bond purchases is coming in September.
"Given the startling impact of Bernanke's speech two years ago there were some in the market who hoped that he would give clear guidance of additional QE for the next FOMC meeting which starts on Wednesday 12 September," said Ken Dickson, investment director of currencies at Standard Life Investments in Edinburgh, which manages assets of $256.6 billion." This year, however, the speech delivered no new news."
"Nevertheless Bernanke makes it very clear that he thinks that QE is an effective tool and notes that employment has not recovered in line with the normal pattern seen after each recession since World War II," Dickson said.
The euro zone common currency also drew support from month-end flows, Middle East buying and expectations the European Central Bank will announce clear steps to tackle the euro zone debt crisis at its policy meeting next week.
The ECB meets next Thursday and hopes of bond-buying have grown, although investors will likely wait to see whether the ECB provides enough details before buying euros aggressively.
France's member on the ECB executive board, Benoit Coeure, appeared to take a softer line than his German colleague on conditions for the central bank buying sovereign debt, saying on Friday that simply supporting the EU's rescue funds would suffice.
German central bank chief Jens Weidmann's reported threat to resign has piled pressure on ECB President Mario Draghi to assuage his opposition to a new bond-buying plan.
"Ahead of the ECB meeting next week the market expectation still seems to be that President Draghi will deliver -- that is, he will outline a credible plan to save the euro zone next Thursday," Citigroup wrote to clients.
"We have repeatedly expressed our skepticism that the ECB would live up to the elevated market expectations. Even if there is a concrete plan on how to implement the conditional bond purchases program, important questions will likely remain."
The dollar fell to a session trough of 78.18 yen, the weakest in more than two weeks. It was last at 78.30, down 0.4 percent on the day.
On the week, the euro rose about 0.5 percent against the dollar, its third straight week of gains. The dollar fell about 0.5 percent against the yen, it second week of declines.
Currency speculators turned negative on the U.S. dollar in the latest week for the first in nearly a year, according to data from the Commodity Futures Trading Commission released on Friday.
The data was collated through to Tuesday, three days before Bernanke spoke in Wyoming. Data reflecting trading after Bernanke's speech will be collated next Tuesday and released next Friday.
(Reporting by Nick Olivari, Wanfeng Zhou and Julie Haviv; Editing by James Dalgleish)