Dollar tumbles on Bernanke speech, euro rebounds

Reuters
July 13, 2011

The dollar fell against most major currencies on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank could resort to more monetary stimulus if a sluggish U.S. economy weakens further.

That pushed the euro above $1.41, moving it further from the prior session’s four-month low beneath $1.39 and on track for its best day since mid-April.

Surprisingly swift Chinese growth data also helped divert attention, at least temporarily, from a worsening euro zone debt crisis, as Fitch Ratings, which said an ambitious Italian deficit reduction plan would help stabilize its credit rating.

“The comments from Bernanke and Fitch amount to a double whammy for the dollar and a boost for the euro and riskier assets. It’s all positive for risk,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.

The Fed ended its most recent asset-purchase program in June. Traders said that another round of easing would flood the financial system with more money and encourage investors to reach for higher-yielding currencies and assets.

Major U.S. stock indexes rose more than 1 percent and gold hit a record high. The euro was last at $1.4142, up 1.2 percent. It also rose 1.7 percent against the yen.

The high-yielding, commodity-sensitive Australian and New Zealand dollars rose sharply.

Fitch’s remarks eased worries about Italy, which saw its borrowing costs soar this week for fear a default in Greece would hurt European banks and strain other countries’ finances.

Italy is considered especially vulnerable, as it has the euro zone’s second largest debt-to-output ratio, which would become harder to finance with higher borrowing costs.

Still, some analysts said markets remained anxious. European leaders, set to convene an emergency meeting on Friday, have yet to agree on a second Greek bailout.

“I’d call this a short-term respite,” said Firas Askari, head of FX trading at BMO Capital Markets. “If we don’t hear anything substantial from Europe by the weekend, people will be back to shorting the euro next week.”

In the options market, one-month risk reversals were elevated in favor of euro puts — options to sell the currency, with plenty of event risks ahead, including the results of stress tests on euro zone banks due out on Friday.

Reflecting that unease, the yen soared against the euro and hit its highest level against the dollar since Japan’s March earthquake as investors unwound risky trades funded with yen.

The dollar was last at 79.08 yen, not far from its 78.48 four-month low.

That brought warnings from top Japanese officials worried that a strengthening yen will hurt Japan’s fragile economy, raising the possibility that authorities could intervene to weaken the currency.

The dollar also fell to a fresh record trough of 0.8250 Swiss francs after Bernanke’s testimony, and Askari said markets were also on edge about a pending deadline to lift the U.S. debt ceiling.

“We still have not seen the political will in either Europe or the United States to resolve the key issues,” Askari said, which makes positioning for currency investors difficult.

“With currencies, it’s hard to be short everything. The Swiss franc is appreciated, but even Swiss banks won’t be immune from a meltdown in Europe,” he said.

Derivatives Markets will continue to operate without oversight

3M and Cargill are on the list of corporations that asked to be exempted from recently passed laws.

AP

Treasury Secretary Timothy Geithner has decided to let companies continue to trade certain contracts used to guard against swings in currency values outside regulators’ view.

New rules require that many such trades happen more transparently, on exchanges where regulators can see them. But Geithner is exempting certain contracts used by companies to hedge currency rates.

The new financial overhaul law authorized Geithner to carve out such an exemption to stricter regulation.

Business groups argue that tighter oversight of such contracts would be costly and unnecessary. But critics, including some regulators, counter that the whole market for financial contracts called over-the-counter derivatives should face stricter supervision.

The value of derivatives hinges on an underlying investment, such as currencies, stocks or mortgages. Speculators who used over-the-counter derivatives helped fuel the 2008 financial crisis.

Sen. Carl Levin, who pushed for tighter regulation after the crisis, said Geithner’s decision might open the door for lax oversight in the future.

Treasury’s top markets official said the contracts already include many of the safeguards the new rules impose. Investors can find information on the price for each contract, for example. Some of the contracts are traded on electronic platforms, which are less likely to freeze up after an unexpected financial shock.

Imposing new rules would mean “introducing an additional process into what is a very well-functioning market today, and you would be putting more steps into the settlement process,” said Mary Miller, assistant Treasury secretary for financial markets.

Miller argued that even with the exemption, the market will become more transparent. Companies will have to report the contracts in real time, after they make a trade. The information will go to central databanks that regulators can see.

Still, the contracts, called foreign-exchange swaps, wouldn’t be subject to other requirements that experts say would make them more transparent.

The contracts that Geithner carved out account for about $30 trillion of the $600 trillion global market for over-the-counter derivatives, Treasury said. The new, tougher rules will apply to currency swaps, options and other contracts used for similar purposes.

Multinational corporations such as Cargill and 3M argued for the exemption. They said the new rules would have raised their costs, thereby limiting their ability to grow and create jobs.

Advocates of tighter regulation say closer oversight is needed at each stage of the process — before, during and after a trade. They say the exemptions will make some types of trades harder to oversee.

Michael Greenberger, a former official with the Commodity Futures Trading Commission, which is responsible for policing much of the derivatives market, disputed Treasury’s main defense of the exemption — that the contracts expire so fast that they don’t pose serious risks to the financial system.

“Within the next 60 months, there will be a systemic break in this market, said Greenberger, now a law professor at the University of Maryland.

The decision technically is a proposal. Treasury will accept public comments for 30 days before finalizing the exemption.