NEW YORK (Dow Jones)--The dollar slid sharply versus major rivals Thursday after Federal Reserve chairman Ben Bernanke signalled that a pause in Fed interest rates could be near.
In the knee-jerk reaction phase, the euro climbed to a fresh three-month high at $1.2496 and the dollar dropped some 30 pips versus the yen.
At 10.12 a.m. EDT (1412 GMT), the euro was trading around $1.2490 from $1.2430 prior to the release of the Bernanke remarks and from $1.2452 late Wednesday, according to EBS. The dollar was at Y114.24 from Y114.99 pre-Bernanke and Y114.74 late a day ago.
The euro was trading around Y142.69 from Y142.86 late Wednesday. The dollar was quoted at CHF1.2653 from CHF1.2706, while sterling was trading at $1.7931 from $1.7850.
In prepared remarks to the Congressional Joint Economic Committee, Bernanke appeared to prep markets for an eventual pause in the Fed's nearly two-year tightening cycle, signaling that any such pause doesn't necessarily mean an end to rate moves.
"At some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook," Bernanke said.
"Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the Committee will not hesitate to act" if necessary, Bernanke added.
"While it is likely that current account imbalances will be resolved gradually over time, there is a small risk of a sudden shift in sentiment that could lead to disruptive changes in the value of the dollar and in other asset prices," Bernanke also said, spooking the markets with an explicit mention of the dollar.
The euro rose above $1.25 in the wake of Bernanke's testimony and is gyrating on both sides of the $1.25 level, with an intraday peak at $1.2533. Choppy trading is the usual pattern as traders adjust positions following statements from top policy makers.
At 10:35 a.m EDT (1430 GMT), the euro was trading around $1.2526 from $1.2452 late Wednesday, according to EBS. The dollar was at Y114.12 from Y114.74. The euro was trading around Y142.97 from Y142.86 late Wednesday. The dollar was quoted at CHF1.2605 from CHF1.2706, while sterling touched a seven-month high versus the dollar at $1.7997 from $1.7850.
Analysts say that the comments have weighed on the dollar because Bernanke suggested there could be a pause in interest rate hikes after lifting rates at the past 15 meetings in 25 basis points increments to 4.75%. The Federal Open Market Committee is widely expected to raise official rates a 16th-straight time at its May 10 meeting to 5%. That would be the second increase under Bernanke since he became chairman in February.
"For the most part, Bernanke is sticking to the Fed line but the market is really reacting to his comments about a possible pause in Fed rates hikes," said Mitul Kotecha, currency strategist at Calyon in London.
Kotecha said that Bernanke had clearly opened the door for a possible pause in interest rates.
"Bernanke retained the comment about further tightening may be needed, but his comments were pretty consistent with rates peaking around five percent," said Kotecha. "Given that market had been pricing in more than one hike... we're seeing the dollar fall.