Jan. 5 (Bloomberg) -- The dollar fell to a record against the euro in Asia after Federal Reserve Governor Ben S. Bernanke said the risk of a dollar crisis is ``quite low'' and that valuing the currency only against the euro may be ``misleading.'' ``Looking at movements of the dollar against a single currency can be misleading about overall trends,'' Bernanke said in the text of a speech to the American Economic Association's annual meeting in San Diego. The dollar fell 17 percent versus the euro last year and 9.7 percent against the yen after the Fed said it can keep rates low well into 2004. Bernanke also said the dollar's decline will have a ``relatively small'' impact on inflation, suggesting the central bank won't set policies to support the currency.
The U.S. currency weakened to $1.2659 per euro at 2:45 p.m. in Tokyo, according to EBS prices, from $1.2585 late Friday in New York, after sinking to $1.2672. The dollar was also at 106.90 yen from 107.07. Bernanke's comments ``suggested the U.S. will maintain the low interest rates for a while, triggering a new round of dollar selling on the first trading day of the year'' in Japan, said Kikuko Takeda, manager of the foreign exchange and treasury division at Bank of Tokyo-Mitsubishi Ltd., a unit of Japan's third-biggest lender. The dollar may weaken to $1.29 per euro at the end of March, Takeda said. ECB Rates The European Central Bank, whose benchmark rate is twice the Fed's 1 percent target for overnight loans, suggested it's comfortable with the currency's advance. Bernanke's currency comments were included in his remarks about the outlook for inflation and Fed interest-rate policy. The dollar's decline, which makes overseas goods more expensive for Americans to buy, should not raise inflation expectations because imports have only a ``modest'' weight in the goods and services purchased by consumers, Bernanke said. ``The direct effects of dollar depreciation on inflation, like those of commodity price increases, appear to be relatively small,'' Bernanke said. A 10 percent decline in the broad value of the dollar might push up consumer prices, not the inflation rate, by just 0.1 percent to 0.3 percent over time, he said. Judging the dollar's strength or weakness solely against the euro may also be misleading because its value against the currencies of major trading partners is about 7 percent above its average in the 1990s and 17 percent above the low it reached in 1995, Bernanke said. The dollar fell 9.8 percent against the British pound and 10 percent against the Swiss franc in 2003.
Bush Administration
U.S. President George W. Bush's administration is untroubled by the dollar's decline, which may help boost sales and manufacturing jobs in an election year. U.S. exchange rate policy is set by the administration rather than the central bank. U.S. Treasury Secretary John Snow told Bloomberg News last month the currency's drop had been ``orderly.'' While he and Bush regularly endorse a ``strong dollar'' they say they want markets, not governments, to set exchange rates. ``The depth of international financial markets and the integration of global financial markets means that the risk of a dollar crisis is quite low -- not zero -- but quite low,'' Bernanke said during a panel discussion at the American Economics Association meeting. Compared with the euro's gain against the dollar last year, the yen's rise versus the U.S. currency was smaller as Japan spent more than 20 trillion yen ($187.2 billion) to stem gains that threaten an export-led recovery.
Yen Sales
The yen fell from 106.77 per dollar to as low as 107.38 after Japan sold its currency, according to traders who deal with the central bank and declined to be named. An official at the Ministry of Finance declined to comment on whether there had been any yen selling. The ministry official asked not to be identified. Earlier, Zembei Mizoguchi, vice finance minister for international affairs, said Japan will sell its currency if necessary. ``We will keep a close watch on the market to ensure there won't be excessive fluctuations and overshooting,'' Mizoguchi told reporters at the Ministry of Finance. ``We will take action as needed.'' ``Price action suggests that the authorities came in,'' said Kosuke Hanao, head of the foreign exchange in Tokyo at Royal Bank of Scotland, the U.K.'s second-largest bank by assets. Still, ``the trend of dollar weakness looks to continue.'' The dollar may trade between 105 and 108 yen in a week, he said.
Eroding Demand
The stronger yen risks eroding demand for Japanese exports. The world's second-largest economy will expand 1.8 percent in the year starting April 1 as companies increase spending and exports rise, the government said on Dec. 19. Toshiba Corp., the world's third-largest chipmaker, predicted the yen's exchange rate would average 115 in the second half of the fiscal year that ends March 31. Nissan Motor Co. forecast a rate of 110. The dollar may also drop against the yen on speculation overseas investors will extend their purchases of Japanese shares this year. Japan's currency climbed 11 percent in 2003 against the dollar as the Nikkei 225 Stock Average rose 24 percent, the first gain in four years. The benchmark stock index rose 1.4 percent today on the first trading day of the year. Japanese financial markets closed after the morning session today.
Bullish on Equities
``Overseas investors look bullish on Japanese equities, setting the groundwork for the yen to gain further,'' said Minoru Shioiri, foreign exchange manager in Tokyo at Mitsubishi Securities Co. The dollar may drop below 105 in the first quarter, Shioiri said. The dollar may extend its decline because interest rates in Europe are higher than in the U.S., according to a Bloomberg News survey. More than 70 percent of 32 strategists, traders and investors polled last week from New York to Tokyo advised buying or holding the euro versus the dollar. Almost 90 percent favored buying or holding the yen. In other trading, the euro rose to 135.32 yen from 134.65 late Friday in New York. The British pound gained to $1.7959 from $1.7935, while the dollar dropped to 1.2333 Swiss francs from 1.2390. //www.bloomberg.com