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FOREX-Dollar drops broadly as Fed unleashes new stimulus
September 13, 2012 / 8:11 PM / 5 years ago

FOREX-Dollar drops broadly as Fed unleashes new stimulus

* Fed announces new stimulus program
    * Fed extends low-rate pledge
    * Dollar falls to 7-month low versus yen
    * Euro hits 4-month high against dollar

    By Julie Haviv
    NEW YORK, Sept 13 (Reuters) - The dollar fell broadly in
choppy trade on Thursday, hitting a seven-month low against the
yen and a four-month trough versus the euro as the Federal
Reserve announced another aggressive stimulus program to bolter
the U.S. economy.
    In a significant shift in monetary policy, the Fed said it
would buy $40 billion of mortgage debt per month and will
continue to purchase those and other assets until the weak
employment picture shows marked improvement. 
    Fed officials also said they were not likely to raise
interest rates from current rock-bottom lows until at least
mid-2015. Previously, it had set such guidance at late 2014. 
    "The Fed news was very bullish for risk assets and people
were quite comfortable selling the dollar against almost
everything, particularly emerging market currencies and the
Australian dollar," said Brad Bechtel, managing director at
Faros Trading in Stamford, Connecticut.
    The euro initially tumbled to a session low of $1.2856
following the release of the Fed's statement, a result of
illiquid trade, but later it hit a high of $1.3001.
    "At $1.30 investors are comfortable selling the euro and by
the end of the month the currency should be lower because there
is still a lot of wood to chop with regard to the debt crisis
and there is also the threat of a lot of headline risk," Bechtel
    The euro last traded at $1.2984, up 0.7 percent on
the day and its highest since May 9.
    Many market participants expected the Fed to launch a third
asset purchase program after the close of a two-day meeting. A
new round of bond purchases, known as quantitative easing, or
QE, is viewed as negative for the dollar because it is
tantamount to printing money and dilutes its value.
    "I was expecting them to keep it more open-ended, but
overall, we're getting QE3," said Omer Esiner, chief market
analyst at Commonwealth Foreign Exchange in Washington, D.C.
    "The knee-jerk reaction to sell the dollar is the correct
one," he said. "I do wonder how much lower the dollar can go,
though, given that much of this was priced in." 
    Against the yen, the dollar last traded at 77.48 yen,
down 0.4 percent on the day, after hitting a low of 77.11, its
lowest since Feb. 9. Further falls would put markets on alert
for possible intervention by Japanese monetary authorities to
stem the rise in the yen, traders said.
    In its prior two rounds of QE, the Fed bought about $2.3
trillion in bonds to lower long-term interest rates. While lower
rates may prod more U.S. business and residential investment, it
is seen as dollar-bearish since there is less incentive for
foreigners to buy what could be lower-yielding U.S. debt.

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