September 13, 2012 / 1:41 PM / 5 years ago

FOREX-Dollar slides vs most currencies on expected Fed easing

* 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 Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 13 (Reuters) - The U.S. dollar dropped to a
seven-month low against the yen on Thursday and held near a
four-month trough versus the euro on increased expectations the
Federal Reserve will announce a third round of monetary
    Many in the market expect the Fed will launch a new asset
purchase program when it issues its policy decision later in the
day after the close of a two-day meeting. A new round of bond
purchases, known as quantitative easing, is viewed as negative
for the dollar. 
    "Given Bernanke's comments at Jackson Hole, the markets
expect some sort of easing," said Matthew Lifson, senior trader
and analyst at Cambridge Mercantile Group in Princeton, New
    Fed Chairman Ben Bernanke, at the Fed's annual conference in
Jackson Hole, Wyoming, last month, had stressed the need to
bring down the country's stubbornly high jobless rate and said
the U.S. central bank would act as needed to spur the recovery.
    Lifson noted that the dollar's sell-off this week has been
due to expectations of further monetary stimulus from the Fed.
If the Fed does announce new easing measures on Thursday, Lifson
said it would initially be dollar-negative, but may not have
much lasting impact. 
    The dollar fell to 77.41 yen, its lowest level since
mid-February when the Bank of Japan unexpectedly eased monetary
policy. Further falls would put markets on alert for possible
intervention by Japanese monetary authorities to stem the rise
in the yen, traders said.
    U.S. jobless claims data on Thursday was weaker than
expected as new claims hit a two-month high, reinforcing the
view on Fed easing, even though producer prices rose more than
    The euro was little changed at  $1.2903, not far from
a four-month high of $1.2936 reached on Wednesday.
    The euro 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 does take new stimulus
steps, said Gavin Friend, currency strategist at National
Australia Bank. "It might get almost to $1.30 and next week
should consolidate around that level."
    "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 range between $1.26 and $1.31 in
coming months.
    But if the Fed fails to deliver new stimulus, he predicted
the euro's fall would be limited to around $1.2850.
    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 the ECB pledged to do
whatever it takes to preserve the currency.
    The euro rose 0.2 percent against the Swiss franc to 1.2109
francs, having earlier dipped after the Swiss National
Bank said it would maintain its 1.20 franc floor in
    The move disappointed some investors who had speculated the
SNB might raise the floor, but analysts said the fact the euro
did not sell off heavily was a sign of growing confidence in the
ECB's plan to tackle high borrowing costs in heavily indebted
member countries.
    Mounting expectations the Fed might print more dollars,
thereby cheapening the currency's value, pushed the dollar index
 down 0.1 percent to 79.684, keeping it near a four-month
low of 79.522 on Wednesday.
    Many Fed watchers believe any new asset purchase program
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 program as
economic circumstances warrant. 
    "The market has not 100 percent priced in QE3 yet," said
Masafumi Yamamoto, chief FX strategist at Barclays. He said that
if the Fed does launch QE3, what would be important is whether
the monthly purchase size was larger than the previous QE
round's $75 billion, regardless of whether the new program was
    Also helping the euro was the result of elections in the
Netherlands, where pro-European parties crushed radical fringe
groupings, dispelling concerns that euro-skeptics could gain a
power base in one of the euro zone's core states.
    The euro slid against the yen, trading at 100.07
yen but not far from Wednesday's high of 100.64 yen.

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