September 13, 2012 / 9:01 AM / 5 years ago

FOREX-Dollar falls on Fed easing expectations

* Dollar falls to 7-month low versus yen
    * Euro stays near 4-month high against dollar
    * Dollar could extend falls if Fed opts for more stimulus
    * SNB keeps Swiss franc cap at 1.20 per euro

    By Jessica Mortimer
    LONDON, Sept 13 (Reuters) - The dollar fell on Thursday,
hitting a seven-month low against the yen and holding near a
four-month low versus the euro on signs the Federal Reserve may
announce a third bout of monetary stimulus.
    Many in the market expect the Fed to unveil a new 'QE3'
asset purchase programme when it gives its policy decision at
1630 GMT. This would likely cause the dollar to
extend losses.
    The dollar fell to 77.58 yen, its lowest since
mid-February. Further falls would put markets on alert for
possible intervention in Tokyo to stem the rise in the Japanese
currency, traders said.
    The euro was up 0.15 percent at $1.2919, near a
four-month high of $1.2937 reached on Wednesday.
    It remained firm after Germany's Constitutional Court on
Wednesday cleared ratification of the euro zone's permanent
rescue fund, paving the way for the European Central Bank to buy
bonds of struggling countries in the region. 
    "Although the market broadly expects more easing from the
Fed, the euro should pop up (if the Fed announces more easing).
It might get almost to $1.30 and next week should consolidate
around that level," said Gavin Friend, currency strategist at
National Australia Bank.
    The euro has been buoyant since the ECB announced plans last
week to buy potentially unlimited amounts of government bonds
issued by indebted states like Spain and Italy to reduce their
borrowing costs.
    "We are talking about a significant reduction in the tail
risks surrounding the euro zone," Friend said, adding he
expected the euro to trade in a higher range of between $1.26
and $1.31.
    If the Fed fails to deliver the stimulus anticipated, he
predicted the euro's falls would be limited to around $1.2850.
    But traders cited chart resistance for the euro at the
233-day moving average at $1.2938 while a reportedly large
options expiry at $1.2900 later in the day could influence price
action and keep the euro trading close to that level.
    The currency has risen more than 7 percent from July's
two-year low of $1.2042, buoyed after an ECB pledge to do
whatever it takes to preserve the currency.
    "If the Fed avoids major easing steps, the euro could fall.
Still, considering that the euro's rally has been driven by
short-covering rather than build-up of new positions, downside
for the euro may be limited," said Koichi Takamatsu, head of
forex at Nomura Securities in Tokyo.
    The Swiss franc was slightly weaker, having briefly risen
earlier on relief the Swiss National Bank did not weaken the
franc cap from its current level of 1.20 per euro. The SNB said
the Swiss franc was "still high" and threatened to take further
steps if necessary. 
    The common currency was last up 0.1 percent at 1.2102 francs
.
    
    ALL EYES ON FED
    Mounting expectations the Fed might print more dollars,
thereby cheapening their value, pushed the dollar index 
down 0.1 percent to 79.640, keeping it near a four-month low of
79.522 on Wednesday.
    Many Fed watchers believe any new asset purchase programme
would be open-ended, unlike the past two cycles of quantitative
easing. That would allow the central bank to review the size of
its purchases on a frequent basis and adjust the programme as
economic circumstances warranted. 
    "The market has not 100 percent priced in QE3 yet," said
Masafumi Yamamoto, chief FX strategist at Barclays, noting that
whether the monthly purchase size was larger than the previous
QE round's $75 billion would be important, regardless of whether
the new programme was open-ended or not.
    Also helping the euro was the result of elections in the
Netherlands, where pro-European parties crushed radical fringe
groupings, dispelling concerns that eurosceptics could gain a
power base in one of the euro zone's core states.
 
    The euro dipped against the yen, trading at
100.21 yen but staying not far from Wednesday's high
of 100.64 yen. Against the pound, it stood at 80.13 pence
, having hit a 10-week high of 80.28 on Wednesday.

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