Dollar Drops to Lowest Since January Versus Euro on Fed Easing

Wednesday, 03 November 2010 04:02 PM

Nov. 3 (Bloomberg) -- The dollar fell to a nine-month low versus the euro after the Federal Reserve said it will pump more money into the economy by boosting asset purchases to spur inflation and employment, debasing the world’s reserve currency.

The greenback fell against most of its major counterparts as the Fed said it will buy $600 billion of Treasuries under a policy know as quantitative easing. The dollar has weakened 11 percent versus the euro since Aug. 27, when Fed Chairman Ben S. Bernanke said the central bank would “do all that it can” to sustain the economic recovery.

“Quantitative easing is by its nature corrosive to the value of the currency,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “The larger the quantitative easing measure, the worse it is for the dollar.”

The dollar fell 0.6 percent against the euro to $1.4118 at 3:54 p.m. in New York, from $1.4034 yesterday. It touched $1.4179, matching a low reached Jan. 26. The dollar rose 0.7 percent to 81.20 yen, from 80.63. The Japanese currency dropped against all major currencies on speculation the Fed’s program will increase demand for higher yielding assets.

The Fed plans to buy Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. Policy makers, who said new purchases will be about $75 billion a month, “will adjust the program as needed to best foster maximum employment and price stability,” the Fed’s Open Market Committee said in a statement in Washington. The central bank kept its pledge to keep interest rates low for an “extended period.”

‘Throwing Money’

Economists’ forecasts for the size of the purchase ranged from $500 billion to $2 trillion.

“Basically as far of the dollar is concerned, it keeps throwing money at the problem, so this is helping risk assets, what we’re seeing is commodity price inflation,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “It’s the Fed’s attempt to help the economy and monetary policy is only part of the equation.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, has declined 1.8 percent this year. It has fallen 12 percent since reaching a 2010 high of 88.708 on June 7.

Yen Rally

The yen has gained 14 percent versus the greenback this year even after Japan’s effort to curb its advance on Sept. 15, when the Finance Ministry acknowledged intervening in the market by selling the currency.

A cheaper dollar would boost U.S. growth by helping American exports, while strengthening currencies abroad and threatening European and Japanese expansion. Group of 20 finance ministers and central bankers pledged last month to avoid “competitive devaluation of currencies.”

The European Central Bank and Bank of England are scheduled to meet tomorrow, and the Bank of Japan meets Nov. 5.

New Zealand’s dollar rose against all its major counterparts and touched 77.71 U.S. cents, the highest level since June 2008, as the premium the nation’s three-year bonds offer over similar maturity Treasuries widened to 3.63 percentage points, the most since December. The benchmark interest rate is 3 percent in New Zealand, versus as low as zero in the U.S.

Jackson Hole

U.S. stocks rose with the Standard & Poor’s 500 Index gaining 1.3 percent after dropping as much as 0.8 percent before the announcement. Crude oil jumped 1.3 percent to $84.96 a barrel.

“The quantitative easing story got credible in the wake of Bernanke’s speech at Jackson Hole,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “Ever since, the dollar has been on the back foot, it has been hit across the board,” referring to Bernanke’s Aug.27 speech in Jackson Hole, Wyoming.

Bernanke added in a speech in Boston on Oct. 15 that additional monetary stimulus might be warranted because inflation is too low and unemployment too high. The jobless rate has been 9.5 percent or higher for 14 straight months.

The central bank’s preferred price measure, which excludes food and fuel, was unchanged in September from the prior month and was up 1.2 percent from a year earlier, the smallest gain since September 2001. The Fed has a mandate to promote maximum employment and price stability.

The Fed also began a program in August to reinvest principal payments on its mortgage holdings into long-term government debt to keep money from being drained out of the financial system. It has bought $64.82 billion.

Including Treasury purchases from reinvesting proceeds of mortgage payments, the Fed will buy a total of $850 billion to $900 billion of securities through June, or about $110 billion per month, the New York Fed said in accompanying statement.

--With assistance from Joseph Brusuelas in New York. Editors: Dave Liedtka, Paul Cox

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

© Copyright 2018 Bloomberg News. All rights reserved.

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Nov. 3 (Bloomberg) -- The dollar fell to a nine-month low versus the euro after the Federal Reserve said it will pump more money into the economy by boosting asset purchases to spur inflation and employment, debasing the world’s reserve currency. The greenback fell against...
Wednesday, 03 November 2010 04:02 PM
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