September 13, 2012 / 11:57 AM / 5 years ago

FOREX-Dollar falls broadly as market bets on 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 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 will
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 later
in the session. This would likely cause the
dollar to extend losses.
    The dollar fell to 77.58 yen on trading platform EBS,
its lowest since mid-February when the Bank of Japan
unexpectedly eased monetary policy. 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 0.1 percent at $1.2906, 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.
    "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 in coming months.
    If the Fed fails to deliver the stimulus anticipated, he
predicted the euro's falls 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 an ECB pledge 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 peripheral borrowing costs.
    "We have had some fundamental decisions during the last
week, people might think we have found something like a solution
for the euro zone debt crisis," said Lutz Karpowitz, FX
strategist at Commerzbank.
    "As long as we have got this optimism it seems this is the
reason behind this rise in euro/Swiss."
    Mounting expectations the Fed might print more dollars,
thereby cheapening their value, pushed the dollar index 
down 0.1 percent to 79.655, 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.
    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
100.31 yen but staying not far from Wednesday's high
of 100.64 yen.
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