By William L. Watts
The U.S. dollar regained a little ground versus major rivals
Tuesday, after an opinion column by U.S. Federal Reserve Chairman
Ben Bernanke outlined steps the central bank can take to unwind its
money-printing efforts and mute inflation once the economy begins
to recovery.
"We are confident we have the necessary tools to withdraw policy
accommodation, when that becomes appropriate, in a smooth and
timely manner," Bernanke wrote, in a column published in The Wall
Street Journal. "When the time comes to tighten monetary policy, we
must either eliminate these large reserve balances or, if they
remain, neutralize any potential undesired effects on the
economy."
Bernanke outlined five specific steps the Fed could take to
ensure excess money growth doesn't get the chance to fuel
inflation, but reiterated that economic conditions are unlikely to
warrant a tightening of monetary policy "for an extended
period."
Bernanke is scheduled to testify before the House Financial
Services Committee later Tuesday, delivering the semiannual report
on the economy from the Federal Open Market Committee. He will
repeat his testimony on Wednesday before the Senate Banking
Committee.
Market participants were hoping Bernanke would use the testimony
to provide some more detail on how the Fed plans to exit its
current policy stance, particularly its quantitative-easing
measures, said Jane Foley, research director at Forex.com.
"In effect, Bernanke has now provided some detail and the
slightly firmer stance of the dollar suggests that this is a step
in the right direction in displacing concerns that quantitative
easing will ultimately result in a significant increase in
inflation," she said.
The dollar index (DXY), which tracks the greenback against a
trade-weighted basket of six major currencies, was at 78.983, up
from 78.851 in North American trade late Monday.
The dollar bought 94.25 yen, little changed from 94.29 yen. The
euro changed hands at $1.4220, down slightly from $1.4232 late
Monday, and the British pound bought $1.6425, down from
$1.6550.
Traders said equity markets are likely to continue setting the
tone, however. The dollar has tended to weaken when equity markets
are on the rise.
U.S. stock index futures pointed to a higher open for Wall
Street amid the ongoing flow of second-quarter earnings. Index
futures received a boost after Peoria, Ill.-based
construction-equipment giant Caterpillar (CAT) raised its 2009
profit outlook.
"It will be the stock markets that dominate currencies again
today and with some heavyweight earnings due, positive readings
could further increase the appetite for risk in turn further
supporting the higher yielding currencies and dragging on the safe
haven dollar," said James Hughes, an analyst at CMC Markets.
Currency markets were unmoved by the release of the minutes of
the Bank of Japan's June 15-16 meeting, in which all members of the
Bank of Japan's policy board agreed that economic conditions in
Japan had stopped worsening, with some members beginning to discuss
the end of special liquidity measures.
Currency investors in Japan were also keeping an eye on domestic
political moves. Prime Minister Taro Aso dissolved the lower House
of Representatives Tuesday for a general election Aug. 30, and
apologized to lawmakers in his Liberal Democratic Party for a
series of recent local election defeats.