Forex - Dollar steadies after sharp overnight falls ahead of Bernanke testimony

February 27, 2008: 08:34 AM EST

LONDON, Feb. 27, 2008 (Thomson Financial delivered by Newstex) -- The dollar steadied against major currencies after sharp falls overnight as market players awaited today's testimony by Federal Reserve Chairman Ben Bernanke, as well as US durable goods data.

The dollar plummeted against a range of currencies in Asian trade, with the euro surging through the all-important 1.50 usd level. The move came as yesterday's very weak consumer confidence and housing market data emphasised the dangers of a recession in the US, while very strong PPI inflation data added stagflation fears into the mix.

'In the currency markets, nagging doubts over price stability have seen investors resume their focus upon currencies whose central banks are firmly in inflation-fighting mode,' said Neil Mellor at the Bank of New York Mellon. (NYSE:BK)

'Accordingly, despite a continued back-up in longer-term Treasury yields, the US dollar has come under renewed selling pressure with euro/dollar in particular capturing the headlines with a sharp ascent above the psychologically key 1.50 usd level,' he said.

Markets had also jumped on comments yesterday by Federal Reserve vice-chairman Donald Kohn that even aggressive interest rate cuts in the US 'will not forestall a period of economic weakness in the near term'.

For now, however, the market has calmed ahead of Bernanke's testimony, where investors will be looking to see whether he echoes the concerns expressed by Kohn.

Also in focus will be the release of US durable goods data this afternoon.

Given the European Central Bank's resolutely hawkish stance and its emphasis on the need to tackle inflation, the euro was one of the major gainers against the dollar, hitting a new all-time high of 1.5087 usd, helped by solid euro zone M3 and German consumer confidence data this morning.

The other winners have been the Australian and New Zealand dollars, where interest rates are among the highest in the developed world and in Australia are expected to rise further still.

These currencies, along with the Canadian dollar, have also benefited from a massive rise in commodity prices overnight in the wake of falls in the US dollar.

The Australian dollar was hovering just below the important 0.94 usd level which would take it to a 23-year high, the New Zealand dollar hit a 24-year high of 0.8213 usd, while the Canadian dollar hit a 14-week high of 0.9756 per US dollar.

Elsewhere, the pound remained under pressure. The UK currency had come close to the 2 dollar mark again overnight but fell back on rumours of trouble at a UK bank.

The first estimate to UK fourth quarter GDP were released today and as expected left growth unrevised at a quarterly 0.6 pct. The details of the release were disappointing, however, with UK household spending coming in below forecasts while government spending was above forecasts.