Dollar Drops to Lowest Level Since March as Fed Hints at Easing

The dollar slid to a a five-month low versus the euro on speculation the Federal Reserve’s willingness to ease monetary policy further will damp demand for U.S. assets.

The greenback slid against 13 of its 16 most-traded counterparts after U.S. policy makers said yesterday that they “will provide additional accommodation if needed” to spur growth. The yen strengthened for a third day toward levels that may trigger more selling by the Japanese government. The euro rose versus the dollar to the strongest since April 21. Gold futures reached a record high.

“The euro is the primary alternative to the investors selling the pound and the dollar,” said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “Stocks are down on greater concern of a U.S. slowdown and gold is at a record high, telling you currency is on the outs.”

The dollar slid 1 percent to $1.3393 per euro at 4:20 p.m. in New York, from $1.3264 yesterday, after reaching $1.3440. The U.S. currency dropped 0.7 percent to 84.53 yen, from 85.09. The euro climbed 0.3 percent to 113.21 yen, from 112.87.

The Standard & Poor’s 500 Index fell 0.5 percent.

Index Selling

Declines in the U.S. currency accelerated after InterContinentalExchange Inc.’s Dollar Index, the gauge of the greenback against the currencies of six major trading partners, fell 0.8 percent to below 80 for the first time since March 18.

“People are looking for other vehicles, for other yields, to make some money,” said Brian Taylor, chief currency trader a Manufacturers & Traders Trust in Buffalo, New York.

The dollar touched 98.39 against the Swiss franc, the lowest level since March 2008. The pound declined 0.7 percent to 85.48 pence per euro, the weakest level since May 26.

The South African rand jumped as much as 1.1 percent against the dollar to 6.9815, the strongest since January 2008, from 7.0535 as gold for December delivery touched an all-time high of $1,296.50 an ounce.

The Federal Open Market Committee said in a statement after its meeting yesterday in Washington that “inflation is likely to remain subdued for some time before rising to levels the committee considers consistent with its mandate.”

Bank of England

The Bank of England signaled that policy makers are moving closer to adding more stimulus to the economy, joining the Fed in contemplating further bond purchases to revive a flagging recovery. The Monetary Policy Committee, led by Governor Mervyn King, voted 8-1 to keep the benchmark interest rate at 0.5 percent and the bond-purchase plan at 200 billion pounds ($313 billion).

“If the Fed does initiate quantitative easing, it counteracts what the Bank of Japan is doing and so the impact on dollar-yen will not last as long as if the Federal Reserve just sat on their hands,” said Kathy Lien, director of currency research with online currency trader GFT Forex in New York.

Demand for the yen may have been tempered by speculation Japan will sell its currency again after intervening in the foreign-exchange market on Sept. 15 for the first time in more than six years. The yen has risen about 1.5 percent since the intervention pushed the currency down to a one-month low from a 15-year high.

Central Bank Watch

The central bank is monitoring the yen’s strength, which is an impediment to the nation’s economic recovery, a Bank of Japan board member, Ryuzo Miyao, said today. He also said the bank plans to take appropriate credit-easing steps if needed. Japanese markets are closed tomorrow for a public holiday.

“They still have an external surplus so the fundamentals will put upward pressure on the yen,” said Aneta Markowska, an economist at Societe Generale in New York who sees the Bank of Japan intervening if the yen falls below 84 yen per dollar. FOREX.com’s Dolan also put the yen-intervention-watch at that level.

Taylor said he does not expect the Bank of Japan to sell yen again before the currency tests the 83 yen per dollar level.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 9,644 on Sept. 14 compared with net shorts of 23,699 a week earlier, data from the Commodity Futures Trading Commission showed on Sept. 17.

Canada’s dollar fell from a six-week high against its U.S. counterpart after a government report showed retail sales unexpectedly fell in July, calling into question the strength of the economic recovery.

The loonie, as the currency is nicknamed, depreciated 0.3 percent to C$1.0300 per U.S. dollar, from C$1.0268 yesterday. It touched C$1.0192, the strongest level since Aug. 6.

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