Dollar Drops as Bernanke Comments Surprise

The U.S. Dollar fell on Thursday following comments made by Ben Bernanke, the Federal Reserve chief, who unexpectedly cautioned markets that the Fed might have to keep the Fed’s accommodative stance in position for a longer period of time as the unemployment rate could be disguising some labor market weakness, but that it would also be dependent upon inflation rates staying low. Markets’ reaction to the comments was swift, though at least one currency strategist believes it may have been an overreaction to long held Fed beliefs. The release of June’s monetary policy meeting minutes reinforced Bernanke’s comments as the minutes indicated that several of the Fed governors wanted to wait for the labor market to improve further before committing to a pull back in stimulus. Markets, however, had been speculating that such a pull back might begin as early as this quarter.

As reported at 1:15 p.m. (JST) in Tokyo, at one point in the Asian trading session the EUR/USD pair had traded at a 3-week peak of $1.32085, a gain of 0.3% from the previous day’s low of $1.2765, before giving back some early gains and trading at $1.3090. The USD/JPY pair dropped to a 2-week trough at 98.20 Yen before recovering to 98.80 Yen, off 0.90% from New York’s late trade. Traders’ expectations for the dollar, however, continue to be that it will gradually strengthen since many believe that the U.S. economy will continue to best its peers.