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Dollar Climbs To Multi-day Highs Against Yen And Franc [USD/CHF]
4/3/2008 7:08:12 AM Thursday morning, the US dollar advanced against its major counterparts and reached new multi-day highs against the yen and the franc. The greenback rallied against the yen and the franc as investors returned to so-called carry trades.

In ‘carry trade`, an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate so that they can reap the difference.

In a testimony yesterday, the U.S. Federal Reserve Chairman Ben Bernanke publicly admitted for the first time that a recession in the United States is possible. He discussed the “difficult period” the U.S. economy is trudging through in testimony on Capitol Hill earlier in the day. In prepared remarks, Bernanke addressed the recent financial turmoil and actions that the Federal Reserve is taking to address these issues.

He said the growth outlook was weaker now than it was when the Fed released its last set of forecasts in January. The Fed expects growth to strengthen in the second half of the year as fiscal and monetary stimulus kicks in, he said. However “the uncertainty attending this forecast is quite high and risks remain to the downside”, he added.

The dollar strengthened to 1.5538 against the Euro at about 6:30 am ET, compared to yesterday`s closing value of 1.5687. The greenback touched a fresh record low of 1.5905 against the euro on March 17th 2008.

The euro declined as the Euro-Zone retail sales fall unexpectedly in February. Retail sales volume dropped 0.5% on month in February, the Eurostat indicated today. This compares to a 0.5% growth in January. Economists had expected a monthly increase of 0.2%.

Against the pound, the US currency rose to 1.9762 during today`s deals, compared to yesterday`s close 1.9877. If the dollar strengthens further, it may test resistance around 1.9703 level.

The pound weakened against the dollar today after the release of a weak Purchasing Managers` Index for the United Kingdom`s services sector.

The PMI`s headline figure dropped to 52.1 in March from February`s 54.0, and against analysts` forecasts for a fall to 53.0.

The Bank of England`s executive director and member of the Monetary Policy Committee Paul Tucker said Wednesday that the consumer price inflation is very likely to rise to materially above the central bank`s 2% target in the near term.

Regarding the rise in inflation Tucker said, “The question is whether that unavoidable temporary rise will remain just that, temporary; or whether it will feed into medium-term expectations of inflation, and so get reflected in wages and prices going forward and, thus, in domestically-generated inflation.”

UK government net reserves increased US$45 million to US$27.1 billion in March, the HM Treasury revealed today. The net reserves increased from US$27.05 billion recorded in February.

During early deals on Thursday, the dollar advanced to a 23-day high of 102.96 against the yen, compared to yesterday`s New York session 102.30. Immediate resistance for the dollar is seen around 104.2 against the yen.

The buck advanced against the yen after touching a 12-½ -year high of 95.79 on March 17. Since then, the dollar has gained around 7%.

The dollar, that closed yesterday`s deals at 1.0090 against the franc, reached a 9-day high of 1.0194 at about 6:30 am ET today. On the upside, 1.031 is seen as the next target level for the buck.

Now, traders are likely to focus on the U.S. jobless claims and ISM non-manufacturing reports, due out in the upcoming session.

The Fed Chairman Ben Bernanke will speak before the Senate Finance Committee on the Bear Stearns sale at 10:00 am ET today.