Dollar Falls After Greenspan Says He Expects Further Decline / No Interest Rate Increase

Tuesday, December 12, 2006

Fed Leaves Rate Unchanged, Signals Softer Outlook

By Craig Torres and Scott Lanman

Dec. 12 (Bloomberg) -- The Federal Reserve kept the benchmark U.S. interest rate at 5.25 percent and suggested a softer growth outlook while continuing to note inflation risks.

The Federal Open Market Committee called the cooling of the housing industry ``substantial,'' one of the few changes in language from its previous statement in October. Policy makers, who met in Washington today, predicted a moderate expansion ``on balance over coming quarters,'' rather than simply ``moderate,'' and called recent economic indicators ``mixed.''

Chairman Ben S. Bernanke still anticipates the economy will withstand the downturn in housing and manufacturing, leaving inflation as his main concern. Traders focused instead on the new language, interpreting it as a step toward interest-rate cuts next year. Bonds yields and the dollar fell.

``The only change I see is a somewhat more dovish assessment of housing,'' said Jeffrey Kleintop, chief investment strategist at PNC Wealth Management in Philadelphia, which oversees $52 billion in assets. ``For the next couple of meetings, they probably won't make any more changes, but will have plenty of opportunities early next year to guide market expectations as to when cuts may begin.''

Today's decision extends a respite from two years of rate increases that ended in June. Bernanke and most of his colleagues are counting on the economy slowing enough to cool inflation without the need to resume tightening credit.


Conflicting Interpretations

Speculation about a rate cut is premature, said Brian Sack, vice president at Macroeconomic Advisers LLC in Washington and a former economist at the Fed's Division of Monetary Affairs.

``The statement was not intended to be a first step towards a policy easing,'' said Sack. ``The `mixed' data and `substantial cooling' in housing have not affected their baseline view that growth will recover going forward and that inflation risks remain.''

Richmond Fed President Jeffrey Lacker cast his fourth dissent in favor of raising the overnight lending rate between banks to bring inflation down at a more rapid pace. Lacker won't vote again until 2009. Chicago Fed President Michael Moskow, who stressed the possibility of higher borrowing costs on Dec. 1, will become a voting member next year.

``Some inflation risks remain,'' the FOMC said, repeating a phrase used since June. ``The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth.''


Bernanke's Year

Bernanke, 52, closed his last policy meeting of the year with core inflation higher than when he succeeded Alan Greenspan on Feb. 1. The economy has slowed and the jobless rate surprised economists by dropping to 4.5 percent, from 4.8 percent at the start of Bernanke's term.

Inflation has been stubbornly elevated based on the Fed's preferred measure, an index tied to consumer spending minus food and energy. The core personal consumption expenditures price index rose 2.4 percent for the year ending October, above the tolerance zone of 1 percent to 2 percent stated by Bernanke and other officials. The October reading was just below the 2.5 percent reported in August, the fastest pace since April 1995.

At the same time, the Fed's pledge to keep inflation low has kept the longer-term outlook for prices stable. Traders expect inflation to average 2.44 percent over the next five years, according to yield differences on Treasury notes and government inflation-indexed bonds. That's below 2.53 percent when Bernanke became chairman on Feb. 1.

Some traders expect the Fed to cut its benchmark rate at or before the May 9 meeting, based on the price of interest-rate futures on the Chicago Board of Trade.


`Holding Pattern'

``The Fed is in a holding pattern,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte, North Carolina. ``They're still concerned about inflation and those fears have not been assuaged.''

Policy makers may be waiting for results of the holiday shopping season to judge whether the housing and auto slumps are spilling over into the broader economy. Consumer spending accounts for about 70 percent of the U.S. economy.

Bernanke, giving his most extensive remarks on the economy since July, said in a Nov. 28 speech that ``economic activity has, on balance, been expanding at a solid pace'' outside of the housing and auto industries.
That clarification may come in the minutes of today's session, to be released on Jan. 2, or in Bernanke's testimony to Congress in February.

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net .


Dollar Falls After Greenspan Says He Expects Further Decline
"I expect that the dollar will continue to drift downward until there is a change in the U.S. current account balance,'' Greenspan said, speaking from Washington by satellite to a business conference in Tel Aviv. "It's imprudent to hold everything in one currency.''

By Min Zeng

Dec. 11 (Bloomberg) -- The dollar fell the most in a week against the euro after former Federal Reserve Chairman Alan Greenspan said the U.S. currency will probably keep dropping until the nation's current-account deficit shrinks.

The U.S. currency fell in three of the past four years. It has lost 10.5 percent this year versus the euro as investors bet the European Central Bank would lift interest rates more than the Fed. It's ``imprudent'' for investors to keep their holdings in one currency, Greenspan said.

``The dollar is heading where the current account deficit goes,'' said Tim Mazanec, a senior currency strategist at Investors Bank & Trust Co. in Boston. ``A widening deficit will cause the U.S. more pain.''

The U.S. currency weakened to $1.3239 per euro at 4:07 p.m. in New York from $1.3203 on Dec. 8. The dollar fell to a 20- month low of $1.3367 per euro this month. The U.S. currency pared some of an earlier gain, trading at 116.97 yen from 116.33 on Dec. 8.

The yen dropped to a record low of 154.87 per euro earlier today after a Bank of Japan official told Jiji Press the central bank probably wouldn't raise interest rates next week.

``I expect that the dollar will continue to drift downward until there is a change in the U.S. current account balance,'' Greenspan said, speaking from Washington by satellite to a business conference in Tel Aviv. ``It's imprudent to hold everything in one currency.''


Trade Shortfall

A bigger shortfall in the U.S. current account, the broadest measure of trade, means more dollars need to be converted into other currencies to pay for imports. The U.S. current-account deficit was $218.4 billion in the second quarter, the second-biggest on record.

``You have a former Fed chairman talking about dollar weakness,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The market is still trapped in a negative dollar sentiment, especially against the euro.''

Losses in the dollar were limited as investors speculated the Fed will keep rates unchanged at a meeting tomorrow and suggest inflation remains a risk. Traders pared bets the Fed will cut rates next quarter following a U.S. Labor Department report on Dec. 8 showing job growth accelerated in November.

The Fed will keep the benchmark overnight lending rate between banks at 5.25 percent for a fourth straight meeting, according to the median estimate in a survey by Bloomberg News. The Bank of Japan's rate is 0.25 percent while the European Central Bank's benchmark is 3.5 percent.

`Inflation Risks'

``Some inflation risks remain,'' the Fed said in a statement after its previous rate decision, on Oct. 25. ``We cannot let up our guard on inflation,'' Fed Bank of Chicago President Michael Moskow said last week in an interview broadcast on CNBC.com.

The personal consumption expenditures price index, minus food and energy, rose 2.4 percent for the year ending October, the 31st month at or above the top of the ``comfort'' range of 1 percent to 2 percent indicated by Fed Chairman Ben S. Bernanke.

Fed funds futures indicate traders see about a 28 percent probability the central bank will reduce rates to 5 percent before April, down from about 100 percent before the labor report.

``I wouldn't go against the Fed right now,'' said Greg Schwake, head of foreign exchange trading at Fortis Financial Services LLC in New York. ``The Fed has been transparent that they are still worried about upside risks in inflation. The sentiment favors the dollar.''

66 Percent
The dollar gained the most in two months against the yen and rebounded from near a 20-month low versus the euro on Dec. 8 as the Labor Department data showed the U.S. added 132,000 new jobs in November after a revised gain of 79,000 a month earlier. The median forecast in a Bloomberg News survey was for 100,000 jobs.
The dollar accounted for about 66 percent of central banks' currency reserves by March, according to the Bank for International Settlements, down from around 70 percent in 2001.

Russia and other oil-producing countries shifted assets away from the dollar and into the euro and yen in the second quarter, the BIS said in its quarterly review.

Russia and members of the Organization of Petroleum Exporting Countries reduced dollar holdings to a two-year low of 65 percent of the total, from 67 percent in the first quarter, the Basel, Switzerland-based bank said in a report on its Web site.

``People are concerned about diversification away from the dollar, especially people at central banks who make long-term decisions about foreign-exchange reserves,'' said Lu Xinyi, chief strategist in Tokyo at Mizuho Corporate Bank Ltd. ``The whole concept implies dollar selling'' against the euro.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net .