The dollar pared gains versus major currencies on Wednesday, after touching a new 11-month high against the euro as comments from Federal Reserve speakers and a well-received U.S. bond auction caused traders to reverse expectations that U.S. interest rates will rise quickly.
Fed Chairman Ben Bernanke said economic conditions continued to improve, though continued weak bank lending and a sluggish housing market remain concerns.
"There's greater assurance that the Fed is not going to be raising interest rates anytime soon," said David Watt, senior currency strategist for RBC Capital Markets. "That's taking some steam out of the rates market and undercutting the U.S. dollar."
Meanwhile, an unscheduled meeting of Treasury Secretary Timothy Geithner and a top Chinese economic official drew attention amid mounting speculation over whether China will soon alter its currency policy.
The euro (CUR_EURUSD) fell for a third day, down to $1.3375, from $1.3398 in late North American trading Tuesday. The shared currency touched $1.3325 during the session, which would be the lowest on a closing basis since early May.
The dollar index (DXY), which measures the U.S unit against a trade-weighted basket of six major currencies, rose to 81.446, up from 81.379 Tuesday. It touched 81.722 earlier in the session.
The Treasury Department garnered record-high demand for $21 billion in 10-year notes (UST10Y) sold during the session.
Bernanke also said inflation appears well contained. Fed officials William Dudley and Thomas Hoenig also weighed in, sounding cautious about the role of ultra-easy monetary policy on asset bubbles.
The British pound (CUR_GBPUSD) recovered from an earlier decline to buy $1.5271, little changed from $1.5276 on Tuesday.
Sterling has been tossed around by polls about the expected outcome of the upcoming elections, with analysts trying to gauge if one party will win enough support to be able to convincingly reduce the U.K.'s deficit.
The dollar turned lower against the Japanese yen, to buy 93.29 yen, down from 93.83 yen late Tuesday.
The Bank of Japan's policy board on Wednesday voted unanimously to keep its key interest-rate target steady at 0.1%, as widely expected.
Still, the gap between U.S. yields and yields on European debt continues moving in favor of the U.S., making its currency more attractive to investors, RBC's Watt said. And even if the market delays expectations of a fed rate hike once again, it's still likely to boost rates before the European Central Bank, the bank of England, and certainly the Bank of Japan.
Keeping the dollar up versus the euro, Greek government bonds tanked after the country said it would revise up its deficit forecast for the year. The revision comes as uncertainty mounted over a joint European-International Monetary Fund standby aid package for Greece announced last month.
"Market participants are sending signals to the E.U. and to Greek officials that they want to see some sort of intervention, be it from the ECB or a coordinated inter-government effort to mitigate rollover risks for the Greek government," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
The euro registered little reaction to a downward revision to fourth-quarter euro-zone gross domestic product data, and final purchasing managers' index data for March showed private-sector activity expanded at the fastest pace since August 2007.
Chinese policy
Meanwhile, Geithner plans to visit with a top Chinese economic official on Thursday amid mounting speculation that Beijing will soon alter currency policy.
Geithner will meet with Wang Qishan, the Chinese vice premier responsible for economic affairs, after a two-day trip to India, a Treasury spokesman told reporters in Mumbai.
"There are good reasons that China will want to take action for its own good," said Manpreet Gill, head of investment strategy in Asia at Barclays Wealth.
Inflation pressures in China are rising, as are import prices, he said. A stronger currency tends to rein in inflation.
The firm recommends positioning for that appreciation by owning a basket of currencies of other Asian countries that should benefit from a revaluation, as regional competitors would be more comfortable with letting their own currencies strengthen.
The currencies of Singapore, Taiwan, India, Indonesia and Korea are what Barclays Wealth suggests holding.
The Chinese yuan was allowed to appreciate 20% from 2005 until 2008, when it was again "pegged" to the dollar, Gill said. Forward contracts on the currency indicate it's expected to appreciate 2.7% in the next year.
Copyright 2009 Dow Jones Newswires
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