Bloomberg News

Dollar Rises After Fed Keeps Low-Rates Pledge; Euro Weakens

December 13, 2011

Dec. 13 (Bloomberg) -- The dollar strengthened against all of its most-traded counterparts after the Federal Reserve took no additional measures to spur growth, reducing concern policy makers are eroding the value of the world’s reserve currency.

The euro fell to an 11-month low against the dollar on concern European leaders won’t agree on ways to expand the region’s rescue capacities as debt-strapped nations struggle to fund their deficits. The U.S. currency rose for a second day as policy makers led by Chairman Ben S. Bernanke repeated their pledge to keep interest rates low through mid-2013, while refraining from taking more steps to lower borrowing costs.

“There was no indication of QE3,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $26 trillion in assets under administration, referring to the Fed’s policy of asset purchases, known as quantitative easing, or QE. “It led to some modest firming of the U.S. dollar against the majors like the euro.”

The dollar gained 1.1 percent to $1.3037 per euro at 5 p.m. in New York, touching $1.3029, the strongest level since Jan. 12. The shared currency dropped 1.1 percent to 101.68 yen, touching the lowest since Oct. 6. The dollar rose 0.1 percent to 78 yen.

The Standard & Poor’s 500 Index dropped 0.9 percent after gaining as much as 1.1 percent. The Thomson Reuters/Jefferies CRB Index of raw materials rose 1 percent.

Scandinavian Currencies

The Norwegian krone and Sweden’s krona slid the most against the dollar among the 16 major currencies tracked by Bloomberg. The krone dropped 1.7 percent to 5.9373 per dollar and the krona weakened 1.6 percent to 6.9834.

The Swiss franc reached the weakest level against the dollar since February. It fell 0.9 percent to 94.56 centimes, touching 94.48. The pound rose to as high as 84.03 pence per euro, the strongest since Feb. 22.

Fed policy makers said the economy in the U.S. is maintaining its expansion even as the global economy slows.

“The economy has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Federal Open Market Committee said in a statement at the conclusion of its meeting today in Washington. “While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated.”

Rates Pledge

The central bank left unchanged its statement that economic conditions are likely to warrant “exceptionally low” interest rates “at least through mid-2013.” The central bank lowered its target overnight interest rate to a range of zero to 0.25 percent in December 2008.

The greenback dropped four times in five days last week as better-than-expected data signaled the world’s biggest economy will avoid a recession. It rose against its major counterparts yesterday amid concern leaders in Europe failed to make sufficient progress in solving the region’s debt crisis at the recent summit in Brussels.

The euro dropped today against most of its major counterparts after Chancellor Angela Merkel told German coalition lawmakers that the 500 billion euro ($654 billion) cap on Europe’s planned permanent bailout fund will stay in place, two officials with knowledge of the discussion said.

Merkel Update

Merkel, during a meeting of her Christian Democratic caucus in Berlin today, confirmed the limit on the European Stability Mechanism as agreed by European Union leaders at a summit last week, the officials said on condition of anonymity because the talks are behind closed doors.

“The reluctance to raise the ceiling of the permanent bailout fund is like taking candy from a baby,” said Tommy Molloy, chief dealer at FX Solutions, a currency brokerage, in Saddle River, New Jersey. “The very fact that there is any sort of reluctance to fix any problem as it arises suggests that the consensus that we thought was going to start with the EU summit last week really isn’t there.”

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency, adding 200 billion euros to their current bailout fund and tightening rules to curb future debts. They also agreed to move up the creation of the ESM and said that by March the EU will reassess plans to cap the overall lending of the ESM and the temporary fund at 500 billion euros.

German Plan

For the time being, Germany deflected a move to grant the ESM a banking license, which would enable it to multiply its firepower by borrowing from the ECB.

The euro’s tumble below its weakest levels against the dollar reached during October and November suggests the 17- nation currency may weaken to its lowest level this year, according to JPMorgan Chase & Co.

A break below $1.3047, the 61.8 percent Fibonacci retracement level from a four-year low reached in June 2010, may send the shared currency to the weakest this year, according to Niall O’Connor, a New York-based technical analyst with JPMorgan. The 2011 low is $1.2867, reached on Jan. 10.

Implied volatility for the currencies of the Group of Seven nations dropped to 12.97 percent from a high this year of 15.77 percent, reached Sept. 22, according to a JPMorgan Chase & Co. index.

“There are increased illiquid markets through the year end,” said David Mann, regional head of research for the Americas at Standard Chartered Plc. in New York. “A lot of people are staying on the sidelines until January.”

--Editors: Paul Cox, Kenneth Pringle

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

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


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