Bloomberg News

Dollar Hits 5-Week Low Versus Euro on Fed Pledge; Aussie Gains

January 26, 2012

Jan. 26 (Bloomberg) -- The dollar fell to the weakest in more than a month against the euro after the Federal Reserve extended its pledge to keep interest rates low until late 2014.

Australia’s dollar climbed to a 12-week high as Asian stocks advanced and Russia said it may start purchasing the South Pacific nation’s currency. Demand for the 17-nation euro was limited before talks on a Greek debt swap resume. New Zealand’s dollar rose for a fifth day even after the nation’s central bank held its key interest rate at a record low.

“The Fed’s pledge for a prolonged easing of monetary policy boosted risk-on sentiment,” said Kengo Suzuki, manager of the foreign-bond department in Tokyo at Mizuho Securities Co., a unit of Japan’s third-biggest bank by market value. “Dollar selling is likely to continue across the board.”

The dollar lost 0.2 percent to $1.3127 per euro as of 7:07 a.m. in London after earlier reaching $1.3134, the lowest since Dec. 21. Japan’s currency slid to 101.98 per euro, the weakest since Dec. 26, before rallying 0.1 percent to 101.80. The yen climbed 0.3 percent to 77.56 against the dollar from yesterday, when it reached 78.28, the weakest since Nov. 29.

The MSCI Asia Pacific Index of stocks rose 0.9 percent following a 0.9 percent advance in the Standard & Poor’s 500 Index yesterday.

Fed Pledge

Economic conditions will likely “warrant exceptionally low levels for the federal funds rate at least through late 2014,” the Federal Open Market Committee said in a statement released in Washington yesterday. The Fed had previously pledged to keep its rate target in place until mid-2013.

The central bank also lowered its forecast for economic growth this year to a range of 2.2 percent to 2.7 percent, down from a projection of 2.5 percent to 2.9 percent in November. It predicted an expansion next year of 2.8 percent to 3.2 percent, down from a previous projection of 3.0 percent to 3.5 percent.

U.S. gross domestic product increased at a 3 percent annual rate in the fourth quarter, according to the median forecast of economists in a Bloomberg News survey before the Commerce Department’s releases the data tomorrow. That compares with a 1.8 percent advance in the previous three-month period.

“The Fed was more dovish than the markets had thought, given that recent data have been suggesting the U.S. economy is recovering at a modest pace,” said Mizuho’s Suzuki.

The euro slid against 10 of its 16 major counterparts amid concern European leaders will struggle to reach an agreement on reducing Greece’s debt burden as a means to stem the region’s sovereign crisis. Charles Dallara and Jean Lemierre, negotiating on behalf of private creditors, return to Athens today after European finance ministers insisted bondholders take bigger losses on their Greek debt.

Greek Debt Swap

While the International Monetary Fund suggested that public holders of Greek bonds might also have to increase support, the European Central Bank sees this as potentially damaging to confidence in the institution, according to two people familiar with the Governing Council’s stance, who declined to be identified because the matter is confidential.

“The more the settlement of the debt-swap negotiations gets delayed, the bigger the losses Greece’s private bondholders will be asked to take,” said Makoto Noji, a Tokyo-based senior debt and currency strategist at SMBC Nikko Securities Inc., a unit of Japan’s second-biggest banking group by market value. “Investors can’t start buying the euro at full steam.”

Russian Reserves

The Australian dollar climbed for an eighth day against the yen and a second session versus its U.S. counterpart. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said in Davos, Switzerland that his nation may start buying the Aussie as a reserve currency as soon as early February.

Australia’s dollar rose as much as 0.4 percent to $1.0643, the highest since Oct. 31, and reached 82.61 yen, the strongest since Nov. 1. New Zealand’s dollar climbed as much as 0.5 percent to 82.09 U.S. cents, also the most since Oct. 31, and added 0.1 percent to 63.60 yen.

Reserve Bank of New Zealand Governor Alan Bollard said today it is “prudent” for the central bank to keep interest rates at record low 2.5 percent.

“The RBNZ’s latest post-meeting statement was met with indifference,” Ray Attrill, a senior currency strategist at BNP Paribas SA in New York, wrote in a research note today. The so- called kiwi dollar is “free to fly again” with the passing of “event risk,” he said.

-- Editors: Rocky Swift, Ken McCallum

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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