Bloomberg News

Dollar Falls on Bets Fed Will Keep Stimulus as Debt Buying Ends

June 22, 2011

June 22 (Bloomberg) -- The dollar dropped against a majority of its most-traded counterparts on speculation the Federal Reserve will maintain monetary stimulus without buying more debt as economic growth remains sluggish.

The greenback touched a one-week low versus the euro before the Fed issues a statement after a two-day meeting and Chairman Ben S. Bernanke gives a press conference. The euro weakened versus Norway’s krone amid speculation Greek Prime Minister George Papandreou will struggle to pass additional austerity measures, even after winning a confidence vote yesterday.

“The market is pre-positioned for the Fed in part based on the history that the Fed has tended to be quite supportive of equities and negative for the dollar,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York.

The dollar dropped 0.2 percent to 80.05 yen at 12:12 p.m. in New York, from 80.21 yesterday. It was little changed at $1.4407 per euro after earlier reaching $1.4442, the weakest level since June 15, and gaining as much as 0.5 percent. The euro fell 0.2 percent to 115.34 yen.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major trading partners, was up 0.1 percent to 74.632 after earlier gaining as much as 0.4 percent.

The central bank’s second round of quantitative easing, the purchase of $600 billion of Treasuries, is scheduled to end this month. The benchmark interest rate has been kept at zero to 0.25 percent since December 2008 to support the economy.

Fed Balance Sheet

Seventy-nine percent of 58 economists expect Bernanke to sustain the Fed balance sheet at current levels until October or later, compared with 52 percent who held that view before the Fed’s last policy meeting in April, according to a Bloomberg News survey conducted last week. The Fed’s balance sheet has swelled to a record $2.8 trillion, compared with $873 billion in February 2008.

Ninety percent of those surveyed predict the Fed will wait until the fourth quarter before dropping its pledge to hold interest rates low for an “extended period.”

Bernanke and his colleagues have given no indication they’ll tighten policy any time soon. With manufacturing slowing and unemployment increasing during May to 9.1 percent, the Fed chairman said on June 7 growth is “frustratingly slow.”

Last Meeting

The dollar dropped 1 percent against the euro on April 27, after Bernanke said following the Fed’s last meeting he was unsure when monetary stimulus would unwind, spurring investors to buy higher-yielding assets.

The euro has fallen 1 percent over the past three months versus nine other developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The franc has climbed 5.9 percent as investors sought a haven from Europe’s sovereign-debt crisis.

Greece’s Papandreou will seek approval next week for a 78 billion-euro ($112 billion) package of budget cuts and asset sales to help ensure more financial aid from the European Union and the International Monetary Fund and stave off the threat of default.

The IMF, contributor of a third of the bailout money for Greece and the two other euro-area countries that have received bailouts, Ireland and Portugal, has warned EU leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.”

‘Couple of Weeks’

“What happened yesterday has bought the Papandreou government a couple of weeks to push through budget cuts and austerity measures,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “The scenario is negative; there’s no positive. The euro is weaker than where it was before the vote and is likely to head lower.”

The pound fell for the first time in four days against the greenback as minutes of the last Bank of England meeting showed some officials saw a risk more bond purchases may be required.

The majority of the Monetary Policy Committee said the “current weakness of demand growth was likely to persist for longer than previously thought,” according to minutes of the June 8-9 Bank of England meeting published today in London. Europe’s debt crisis highlighted the potential for further shocks, and for some members, it “was possible that further asset purchases might become warranted,” the notes showed.

The pound slid 0.7 percent to $1.6128 and was 0.6 percent weaker at 89.29 pence per euro.

Norway’s krone was the top performer among major currencies. It extended an advance versus the euro as the Norges Bank kept its benchmark interest rate on hold at 2.25 percent and said gradual increases are projected for the second half of the year.

The krone gained 0.9 percent to 7.8351 per euro and appreciated 0.8 percent against the dollar to 5.4432.

--Editors: Greg Storey, Dennis Fitzgerald

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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