Dollar Fails to Hold Gains After Bernanke Comments

The dollar fell broadly Monday though it rose from session lows after Federal Reserve Chairman Ben Bernanke said the U.S. central bank is attentive to changes in the dollar.

Speaking at the Economic Club of New York Bernanke also said the Fed's mandate will help ensure the dollar remains strong.

Offsetting dollar positive sentiment on Bernanke were cues to sell the greenback on a rise in U.S. retail sales and discord on exchange rates among Asian and U.S. leaders.

With markets expecting record low U.S. interest rates to persist well into 2010, investors continued to favor higher-yielding currencies and assets over the dollar.

Bernanke "allocated a whole paragraph in his speech to foreign exchange, which is unusual and really highlights that there must be a tremendous pressure there," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.

"They clearly have the dollar in view, even though that's not part of their mandate, and markets are buying the dollar on the back of that," she added.

Sutton cautioned, however, there was nothing to indicate a change in Fed monetary policy, something investors focused on after the initial kneejerk reaction to the headlines which eroded much of the dollar's rally.

"I don't think it changes the outlook for monetary policy, and our call is still that they won't raise rates until the third quarter of 2010," Sutton said.

The euro rose to around $1.49 after stopping just shy of $1.50 earlier. Sterling rose to about $1.67 while the dollar fell to near 89 yen .

The yen got a boost from data showing Japan's economy grew at its fastest pace in more than two years between July and September.

Rising risk appetite lifted the Australian dollar to a fresh 15-month high. It last changed hands at around $0.93, up from late Friday.

Exchange Rate Discord in Asia

Investors were also encouraged to sell the dollar against major currencies because the outlook for its exchange rate against China's yuan remained clouded.

A communique at the close of a two-day Asia Pacific summit in Singapore omitted a reference to "market-oriented exchange rates," suggesting China may not be ready to let the yuan rise gradually against the dollar.

Traders said that bolstered market resolve to sell the dollar against the euro and other freely floating currencies instead. The yuan's peg to the dollar keeps the Chinese currency relatively weak against its U.S. counterpart.

"Chinese currency policy is unchanged, which means that they'll still be forced to accumulate and swap more and more dollars for euros," said Neil Mellor, currency strategist at Bank of New York Mellon in London.

The disagreement between Washington and Beijing comes as U.S. President Barack Obama visits China this week.

With U.S. interest rates expected to stay low, analysts expect the euro to climb above $1.50 in the near term, despite two failed attempts to make a sustained break above the level in the past month. A climb above $1.5064 — last month's peak — would mark its highest in 15 months.

Recent data on speculator positioning shows net short positions in the U.S. currency rising against the euro, the yen and the Swiss franc last week.

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