U.S. dollar slips ahead of Fed announcement
The U.S. dollar trended lower against the euro for a sixth day Tuesday, as currency traders awaited a key announcement on interest rates from the Federal Reserve on Wednesday.
The greenback fell 0.38 per cent to $1.4638 against the euro late in the day in New York.
Bernanke must mind his words
Bernanke's historic news conference, the first of three this year, is part of a long-standing campaign to make the central bank more transparent and publicly accessible.
Bernanke must take care not to let unguarded comment unnerve financial markets.
"The press conference is not supposed to add volatility or uncertainty," says Marc Chandler, head of global currency strategy at Brown Brothers Harriman.
To prepare for his news conference, Bernanke has watched tapes of how his counterparts in Europe — Jean-Claude Trichet, president of the European Central Bank and Mervyn King, head of the Bank of England — have performed at news conferences.
Two months ago at a meeting of finance officials in Paris, Bernanke pulled aside Trichet and King to quiz them on how they manage their encounters with reporters.
"If he succeeds, he will not make any impact whatsoever" on bonds, stocks or the dollar, says Timothy Duy, an economist at the University of Oregon who writes a blog on the Fed.
The downward trend suggested investors are speculating the Fed will look at measures to keep bond yields low in order to further stimulate the U.S. economy.
The markets also looked forward to comments from Fed Chairman Ben Bernanke's news conference after the announcement.
With that, Bernanke will become the first chairman of the U.S. Fed to hold a regularly scheduled press conference to explain monetary policy, a response to demands from American lawmakers for the central bank to become more transparent.
The Fed has kept its key rate near zero since December 2008 and launched a $600 billion US bond-buying program to keep rates low.
Stimulus expires in June
The bond program — called quantitative easing two, or QE2 — expires in June and, with global inflation on the rise, economists expect the bank will announce that the bond-buying program will be completed but not extended.
But central banks overseas have already begun raising rates to combat inflation. The American dollar has declined steadily this year.
Higher interest rates tend to support a currency's value.
Markets are most interested in what hints the Fed provides about when it plans to change its low rate policy.
In a recent commentary, TD Economics said it doesn't expect much on that front, "for the simple reason the Fed is unsure of what to do."
"It is all about signaling," it said, "and stung by the aftermath of QE1, the Fed will prefer to play it close to the vest for now, and ultimately on the safe side."
Many commentators blame the Fed's stimulus program for adding to inflation, by pushing more money into the commodities market and fostering speculation.
But Peter Morici, a widely-followed economist at the University of Maryland, laid the blame for inflation at the feet of emerging Asian economies — and most notably China — suggesting it is fed by their efforts to keep their currencies undervalued against the U.S. dollar and to regulate domestic commodity prices.
"Mr. Bernanke would do his cause, and the nation's understanding of the choices he faces, a lot of good if he would articulate the connection between China's currency manipulation and rising gas and food prices, the limits of Fed power to manage inflation and the options available to the Treasury to accomplish solutions," Morici said in a commentary Tuesday.
"However, Mr. Bernanke won't embarrass a Treasury Secretary and President too timid to act, and will continue to carry the pail for the Administration's inaction."
With files from The Associated Press