Forex - Dollar stays close to low vs euro as Bernanke refuses to give rate hint

The dollar remained close to its all-time low against the euro after Federal Reserve chairman Ben Bernanke failed to give markets any further guidance on whether and by how-much the Federal Reserve will cut US interest rates next week.

In a speech in Berlin, Bernanke chose instead to discuss the US's large current account deficit - saying it cannot go indefinitely but is not currently a large drain on the US economy.

Market participants had been hoping Bernanke would give some indication of whether the Fed would cut its key Fed funds rate. However his silence on the matter has left most markets unchanged in their view that rates will go down.

"The fact that he's not said anything is taken by the markets as validating their expectation that the Fed is going to start cutting rates aggressively," said Gavin Friend, currency strategist at Commerzbank.

Most market participants had already priced in a quarter point reduction in the benchmark Fed funds rate, to 5.00 pct, to rein in the effects of the credit crunch on the wider US economy, but last week's disappointing jobs report for August raised the prospect that the Fed may be more aggressive on Sept 18 and cut by 50 basis points. This in turn has pushed the dollar lower against the euro.

However Bernanke did address the problem of the global imbalances in current accounts, saying they needed to be addressed to reduce the "potential strains associated with financing a large quantity of international liabilities and likely allow a smoother adjustment in financial markets,".

This caused the dollar to slip slightly against the yen as it implied policy makers may step up their efforts to curb the carry trade - where investors borrow in low-yielding currencies such as the yen to invest in high yielding ones elsewhere.

"Bernanke did not focus on the rate outlook but on global imbalances, a point which indirectly focuses on the carry trade since this is seen as a result of the global imbalances," said Rhonda Staskow at Thomson IFR Markets.

Earlier today figures showed the US trade deficit narrowed to 59.2 bln usd in July from an upwardly-revised 59.4 bln in June - slightly worse than expectations for and improvement to 59.0 bln.

Meanwhile comments from European Central Bank President Jean-Claude Trichet that inflation risks remain to the upside helped the euro maintain support.