Dollar mostly lower, euro nears $1.50 as Fed official says interest rates may not rise til ‘12

Dollar mostly lower as Fed official says ‘2012′

NEW YORK — The dollar mostly declined Wednesday, with the euro bumping up near $1.50 as a Federal Reserve official said in a speech that interest rates could possibly not rise until 2012 from their current record low near zero — if the Fed acts as it has before.

Lower interest rates can drive down the value of a currency as investors transfer funds in search of assets that yield higher returns. The Fed’s current rock-bottom rate is weighing on the buck as traders use it borrow to buy up riskier assets, a market move called a “carry trade.”

The market expects the Fed to start lifting rates around the middle or the second half of next year. In a speech to local business leaders Wednesday, St. Louis Fed President James Bullard said “the FOMC did not begin policy rate increases until 2.5 to 3 years after the end of the past two recessions,” according to the St. Louis Fed’s Web site. Assuming that the Fed acted similarly to how it acted in the past, that could mean that it wouldn’t start increasing rates until 2012, he said.

Bullard is slated to be a member of the Federal Open Market Committee, the Fed committee that sets interest rates, next year. Membership rotates among the country’s regional Fed presidents.

The 16-nation euro rose to $1.4940 in late New York trading from $1.4855 late Tuesday in New York, despite more comments from European Central Bank President Jean-Claude Trichet supporting the dollar. Fed Chairman Ben Bernanke earlier this week noted the importance of a strong dollar.

The dollar often trades higher because of its safe-haven allure as investors digest worrisome economic reports. On Wednesday, the Commerce Department said construction of new homes sank 10.6 percent last month, to the lowest pace of building since April. That dragged stocks lower — and unusually, the dollar traded down as well.

Brian Kim, foreign exchange strategist for UBS AG in Stamford, Conn., said Bullard’s comments caused “a bit of batting around” of the buck. His comments may have been misunderstood by traders, he said. The St. Louis Fed’s Web site quotes Bullard as saying “the FOMC will be heavily weighing concerns that stem from criticisms that the Fed kept interest rates too low for too long, contributing to the housing market bubble” in past recessions.

“All Bullard is saying is that if the Fed tracks previous cycles, rates won’t go up until 2012,” wrote Miller Tabak economist Dan Greenhaus in a research note. But he said it was “unlikely” the Fed would wait that long to raise rates to about 1 percent.

Bullard’s comments were not much different than what other Fed officials or Bernanke have been saying about the need to keep interest rates low for an “extended period,” Kim said. UBS expects the Fed to start hiking rates around summer of next year.

Meanwhile, in other late trading Wednesday, the British pound slipped to $1.6718 from $1.6797, while the dollar was slightly higher at 89.48 Japanese yen from 89.32 Tuesday. The dollar fell to 1.0114 Swiss francs from 1.0175 francs late Tuesday and edged up to 1.0567 Canadian dollars from 1.0524.