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Dollar rises on Fed's reiteration of tapering plan

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The dollar rose broadly on Wednesday after Federal Reserve Chairman Ben Bernanke confirmed market expectations that the U.S. central bank will start reducing its monetary stimulus this year as long as the economy grows as expected.

The rise was a rebound from the three-week low the dollar hit against major currencies immediately after the release of Bernanke's prepared statement. Disappointing U.S. housing data also put some early selling pressure on the greenback, traders said.

The Fed chairman, in testimony to Congress, said the central bank still expects to start scaling back its massive bond purchase program later this year, but he left open the option of altering that plan if the economic outlook changes.

(Read More: Bernanke: Fed to begin tapering bond purchases later this year)

"I don't think there was a major shift from the chairman today," said Brian Daingerfield, currency strategist at Royal Bank of Scotland in Stamford, Conn.

"I think the dollar had a mixed performance as the markets digest how to take this message on potential tapering of asset purchases, but at the same time keeping policy accommodative for the foreseeable future via interest rate policy," he said.

The euro last traded down 0.3 percent at $1.3123, after earlier touching a session low of $1.3083, according to Reuters data. Initial support was cited at Monday's low of $1.2993.

The dollar rose as high as 99.93 yen and was last trading up 0.5 percent at 99.58 yen, still some way off this month's high of 101.53.

While sticking closely to the timetable he first outlined last month under which the Fed would halt bond buying by mid-2014 when unemployment is projected to be around 7 percent, Bernanke went out of his way to stress that nothing is set in stone.



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The market initially read Bernanke's comments as dovish, which drove the dollar and bond yields lower and sent equities higher. But the dollar rebounded as a reduction of Fed stimulus remains on the agenda this year, analysts said.

"Today's testimony reiterates as long as the economy remains on (its) current course for modest expansion, an autumn tapering of purchases would eventually lead to the termination of purchases by next year," said Ashraf Laidi, chief global strategist at City Index Ltd. in London.

The dollar index, which tracks the greenback's performance against a basket of major currencies, rose 0.2 percent to 82.655, bouncing back after hitting a three-week low of 82.342. The index is straddling its 100-day moving average.

Earlier on Wednesday, data showed U.S. housing starts and permits for future home construction fell unexpectedly in June, but the decline in activity was seen as likely to be short-lived against the backdrop of bullish sentiment among homebuilders.

Analysts said the data-dependent nature of the Fed means the U.S. dollar could see periods of weakness.

"The fact that the Fed seems likely to taper stimulus this year should generally see the dollar hold an edge against its rivals. But the dollar would be susceptible to any downside surprises to data," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

Sterling bucked the trend and gained on the greenback. It reached a two-week high of $1.5270 after minutes from the Bank of England's latest meeting surprised markets by showing all nine MPC members had voted against expanding the bank's bond-buying program. At that level, sterling ran into resistance around the 100-day moving average and slipped to $1.5215, still up 0.4 percent on the day.

(Read More: Bank of England unites against QE under Carney)

This wrong-footed investors who had built large bets against sterling in recent weeks expecting further signals of policy easing.

The Canadian dollar fell after the Bank of Canada said it will hold its benchmark interest rate steady at 1 percent, while the economy remains fragile and inflation stays low. The U.S. currency last traded up 0.4 percent at C$1.0416.

—By Reuters

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