Forex News

FOREX-Dollar undermined by Fed's vigilance on stimulus

26 April, 2012 - Reuters
  • Dollar weakened by Fed's willingness to use balance sheet
  • Fed leaves interest rates unchanged, U.S. outlook brighter
  • Gyrating euro hits 3-week high, loses and regains ground
  • Sterling hits 7-month high

(Recasts, new throughout)

By Daniel Bases

NEW YORK, April 25 (Reuters) - The dollar lost ground against the euro and yen on Wednesday after Federal Reserve chief Ben Bernanke said he was prepared to use the U.S. central bank's balance sheet to spur growth if necessary.

An improved economic outlook from the Fed, issued in a policy statement on Wednesday after the close of its two-day meeting, had initially driven up the dollar on market expectations that interest rates could rise sooner than has been expected. But Bernanke's comments, made later at a news conference, reversed sentiment.

The Fed has previously engaged in two rounds of assets purchases totalling $2.3 trillion, known as quantitative easing, to drive down interest rates and stimulate the economy.

The Fed reiterated its expectation that interest rates will not rise until at least late 2014. Bernanke told the news conference that it was premature to declare victory, despite a modestly brighter assessment of the economy's strength.

"The market was initially focused on the FOMC participants' expectations for the timing of the first increase in the target fed funds rate, but the impact of the more hawkish shift faded once the press conference began," said Andrew Cox, G10 strategist at CitiFX in New York. "The relatively tight ranges across asset markets reflects the absence of new information."

In late New York activity the euro rose 0.21 percent at $1.3223. The euro had earlier climbed to $1.3233, within a whisker of its daily high of $1.3235, according to Reuters data

.

Currency traders had first focused on the slightly more hawkish tone from the Fed that seven policymakers now believe the first increase in rates would happen in 2014, up from five who believed that when polled in January.

"The major takeaway is the Fed is willing to do more if the economy weakens. Unfortunately, that's been their stance all along, and the market has been pulled in both directions over the last month as it parses Fed statements," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.

McCormick said the competing views between growth and use of the Fed's balance sheet "just reinforces the $1.30-$1.34 range."

The euro was supported by successful debt auctions in Europe on Tuesday that sent yields on Dutch, Spanish and Italian bonds lower.

The euro was also supported after the German government stuck to its growth forecasts and backed the European Central Bank in returning to a "normal mode" of monetary policy.

That offset a sale of German 30-year bonds that was technically uncovered as record low yields dampened demand for the safe-haven paper.

The greenback faced early losses against the yen, also hurt by data indicating demand for long-lasting U.S. manufactured goods dropped by the most in three years in March and a gauge of business spending plans fell, suggesting factory activity lost momentum as the first quarter ended.

Buying momentum picked up after the Fed's economic forecasts only to fade by the end of the day. The dollar fell 0.06 percent against the yen to 81.32 yen .

STERLING REDUX

Sterling hit a seven-month high against the dollar following Bernanke's comments, after having earlier fallen on data that showed the UK economy slid into recession after contracting in the first quarter.

Bernanke's warning that more stimulus could not be ruled out helped lift sterling to a seven-month high of $1.6182, according to Reuters data.

Sterling finished the day near $1.6162, up 0.14 percent , after having fallen as low as $1.6082.

The latest data showed the UK sliding back into recession in a first double-dip since the 1970s, curbing demand for a currency that was seen as an alternative to the euro during the heightened concerns about budget problems in Spain and other smaller euro zone economies.

The euro was up 0.04 percent against the pound to 0.8177 pence .

The dollar fell 0.22 percent to 0.9090 Swiss franc, having earlier touched a three-week low of 0.9074 francs .

(Additional reporting by Nick Olivari, Luciana Lopez and Steven C. Johnson in New York; Editing by Leslie Adler)

Copyright Thomson Reuters 2012. All rights reserved.

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