Bloomberg News

Dollar Rallies After Fed Statement; Yen Slumps on BOJ

March 13, 2012

The dollar gained against the euro and yen as the Federal Reserve policy makers raised their assessment of the economy as the labor market gathered strength and refrained from additional steps to lower borrowing costs.

The 17-nation euro fell against most of its 16 major counterparts as a European Central Bank council member said policy makers are discussing ways to withdraw some of the emergency cash they injected into the banking system. The yen declined to its weakest in almost 11 months versus the dollar after the Bank of Japan indicated the central bank will keep using monetary policy to tackle deflation. The pound rallied as U.K. housing prices climbed to a 19-month high.

“There were no changes to the statement other than acknowledging a slightly improved labor force, noting that crude oil is higher and would temporarily push inflation higher and that strains in the financial markets have eased,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto. “It leaves the door open to almost anything in the future, which for today is neutral for the U.S. dollar.”

The dollar strengthened 0.5 percent to $1.3084 against the euro at 5 p.m. in New York. It traded 0.9 percent stronger at 82.94 yen after touching 83.09. Japan’s currency declined 0.3 percent to 108.53 versus the euro.

Fed View

The Federal Open Market Committee, which met today in Washington, kept the central bank’s benchmark interest rate target unchanged at zero to 0.25 percent, where it’s been since December 2008. “The unemployment rate has declined notably in recent months, but remains elevated,” the central bank said in a statement.

“Most of what you’ve read in the statement was what it felt like the market was expecting, with acknowledgment of better data, but no change in policy,” said John Shin, senior G-10 foreign exchange strategist at Bank of America Corp. in New York. “The FOMC didn’t do anything to tilt policy expectations in either direction.”

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.3 percent to 80.122 after the statement. The gauge was earlier buoyed as retail sales in the U.S. rose 1.1 percent in February, according Commerce Department figures.

Shirakawa Weakens Yen

The yen weakened earlier after Bank of Japan Governor Masaaki Shirakawa indicated the central bank will keep using monetary policy as a tool to tackle deflation.

Shirakawa and his board members kept the benchmark interest rate between zero and 0.1 percent, the central bank said in a statement today. Policy makers left the bank’s asset-purchase fund at 30 trillion yen ($360 billion) after unexpectedly boosting bond buying by 10 trillion yen at the Feb. 14 meeting. The measures contributed to weakening the yen and helped boost stocks, Shirakawa told reporters in Tokyo.

The dollar may strengthen to 85 yen by the middle of this year as the greenback’s 100-day moving average rose above its 200-day moving average, forming a so-called golden cross, said Koji Fukaya, Credit Suisse Group AG’s chief currency strategist in Tokyo.

Implied volatility of three-month options on the dollar-yen currency pair declined to 10.85 percent, according to data compiled by Bloomberg. It advanced to 11.21 percent yesterday, the most since Sept. 30. The implied volatility of three-month euro-dollar options declined to 10.73 percent from 11.36 percent a week ago.

Euro Losses

The 17-nation euro touched its weakest level in a month versus the dollar.

“All council members are aware that non-standard measures create risks and have to be unwound,” Jens Weidmann, who heads Germany’s Bundesbank, said at a press conference in Frankfurt today. “We need this discussion and it is taking place. The time frame depends on several things, including how the environment develops.”

Weidmann wrote a letter to ECB President Mario Draghi about the risks the central bank is taking, fueling speculation of a rift.

Sterling gained 1 percent to 83.31 pence per euro after the Royal Institution of Chartered Surveyors home-price gauge increased 3 points from January to minus 13, the strongest reading since July 2010. The pound rose 0.4 percent to $1.5705. It fell to as little as $1.5603 yesterday, the weakest level since Jan. 25.

Norway’s krone was 0.4 percent weaker against the dollar at 5.6985 before the central bank meets tomorrow in Oslo. Verbal intervention has increased in an attempt to contain the krone’s ascent after the currency climbed to a nine-year high of 7.3884 per euro this month.

Japan’s currency slid 5.4 percent during the past month in the worst performance among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar appreciated 0.6 percent, and the euro advanced 0.2 percent.

To contact the reporter on this story: 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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