The USD extended a recovery on Tuesday from one-year lows against the Euro after Federal Reserve Chairman Ben Bernanke’s pledge to stay vigilant against inflation left the door open for another interest rate rise later in June.

Speaking at an international monetary conference in Washington on Monday, Bernanke suggested he was concerned about core inflation accelerating beyond what is consistent with price stability.

The possibility that the Fed will raise rates for the 17th straight time to 5.25 percent sparked a round of dollar short covering, helping the U.S. currency recover from a sell-off on a soft employment report late last week.

But gains were limited as some investors worried that Bernanke’s comments did not necessarily guarantee that a rate rise is in the bag this month.

“The market is more or less split between whether the Fed will raise or not, so it’s hard to take on risk either way at this point,” said Fumihiko Kawano, forex manager at Nomura Securities.
Fed funds futures indicate a roughly 70 percent chance of a rate hike at the Fed’s two-day policy meeting that starts on June 28, up from less than 50 percent on Friday.

Traders said any recovery was likely limited with the renewed focus on a weaker dollar helping rein in the massive U.S. trade deficit and playing a role in correcting global imbalances.
“Bernanke’s comments may have triggered some short covering … but a rise in the dollar/yen to 113 yen is going to be pretty tricky,” said Nobuaki Kubo, forex planning manager at Resona Bank.

So far this year the dollar has tumbled 8 percent against the euro and 5 percent versus the yen, with the slide accelerating after the Group of Seven industrial powers called in April for China and other trade surplus countries to allow more currency strength.

RATES AND DEFICITS
Even if the Fed raises rates later this month, it would likely be the last before the central bank takes a break from the two-year run of credit tightening, just as other major central banks look set to bump up rates.

Dealers said that the dollar could face more downward pressure if the European Central Bank hikes rates at its policy meeting on Thursday, with speculation still simmering of a potential half-percentage point increase.

Most analysts expect the ECB to lift rates by 25 basis points to 2.75 percent and to signal more credit tightening is likely in store.

Global imbalances are also expected to be a focus later in the week with the release of U.S. trade figures on Friday, just as the Group of Eight finance ministers meet in St. Petersburg.
Japanese Finance Minister Sadakazu Tanigaki said the impact of high energy prices on the global economy would be a topic at the G8 meeting.

SOURCE: Reuters

JON’S COMMENT
How much further will the US extend its gain this week and could this be a good time to short the Dollar before the European Central Bank officially announce its rates hike? Even with a rate hike for the US Dollar later this month, with a likely pause afterward and some weak data, I believe the US Dollar will go back to it’s recent lows in the coming months.