Dollar gains on euro after Bernanke comments

LONDON: The dollar gained against the euro but fell against the yen on Tuesday after Federal Reserve chairman Ben Bernanke said he saw signs of improvement in the US economy and financial markets.

In late trading here, the European single currency dipped to 1.4190 dollars from 1.4233 dollars in New York late on Monday.

The dollar slid to 93.68 yen from 94.21 yen reached late Monday.

Bernanke, delivering his semiannual economic report to Congress, cited "notable improvements" in financial markets and a somewhat brighter economic outlook but considerable risks led by high unemployment.

"In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery," Bernanke told the House of Representatives Financial Services Committee.

Bernanke also maintained the Fed was working on a so-called exit strategy to unwind the trillion-dollar stimulus effort it unleashed to help the US economy in the financial crisis.

He said the vast programme "can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation."

Analysts said the comments were broadly positive but were still cautious.

"Although the Fed chairman talked about exit strategies, his emphasis was on economic risks and this cautiousness did not sit well with currency traders," said Kathy Lien, director of currency research at GFT in New York.

"Financial conditions remain stressed and despite stronger earnings, banks could face significant further losses," she said.

The dollar's gain "boils down to the credibility of Bernanke to deliver price stability. And from Bernanke's view we're pulling out of this and recovering," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York.

Elsewhere, the US dollar fell against its Canadian counterpart after the Bank of Canada held its key interest rate unchanged and hiked economic growth forecasts for 2009 and 2010.

The central bank left its overnight interest rate at 0.25 percent and reiterated its "conditional commitment" to leave it at the historically low level until the end of the second quarter of 2010.

It also projected the economy would contract 2.3 percent in 2009 and then expand by 3.0 percent in 2010. In April, it had estimated a 3.0 percent contraction this year and weaker growth of 2.5 percent next year.

The news thrust the US unit below 1.10 Canadian dollars to as low as 1.0966.

Market players were also relieved that troubled US lender CIT Group had reached an emergency loan agreement worth three billion dollars with a group of its main bondholders to avoid bankruptcy.

In trading here on Tuesday, the euro was changing hands at 1.4190 dollars against 1.4233 dollars late on Monday, at 133.22 yen (134.10), 0.8645 pounds (0.8601) and 1.5163 Swiss francs (1.5196).

The dollar stood at 93.68 yen (94.21) and 1.0661 Swiss francs (1.0675).

The pound was at 1.6451 dollars (1.6546).

On the London Bullion Market, the price of gold fell to 947.75 dollars an ounce from 952.75 dollars an ounce late on Monday.