Dollar Weakens, Euro Rises as Fed Purchases Boost Higher-Yielding Assets

The dollar fell against its higher- yielding peers after the Federal Reserve said it will buy an additional $600 billion of Treasuries to boost the U.S. economy.

The Dollar Index slumped to its weakest level since December as stocks in Asia and Europe advanced. The 16-nation euro jumped to a nine-month high against the dollar amid speculation the European Central Bank will keep withdrawing its stimulus measures. The pound advanced after the Bank of England refrained from adding to its asset purchases.

“The initial reaction is that risky assets are being bought,” said Kathleen Brooks, research director in London at Forex.com, a unit of the online currency trading firm Gain Capital, wrote in a client note. The Fed remains “ultra dovish and have left the door open to more. That’s not an environment where the dollar can rally.”

The dollar weakened 0.6 percent to $1.4221 per euro at 12:06 p.m. in London, from $1.4139 in New York yesterday. It earlier depreciated to $1.4244, the weakest since Jan. 20. Against the yen, the dollar depreciated 0.1 percent to 80.96. The greenback was 1.7 percent weaker at 79.32 cents per New Zealand dollar and depreciated 1 percent to 6.522 Swedish krona.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against those of six major U.S. trading partners including the euro, dropped for a third day, losing 0.8 percent to 75.932 after touching 75.961.

The Stoxx Europe 600 Index jumped 1.4 percent after sliding 0.4 percent yesterday. U.S. stock-index futures also climbed.

‘Disappointingly Slow’

The Federal Open Market Committee said in its statement yesterday that it was compelled to act because “progress” toward the objectives of full employment and stable prices “has been disappointingly slow.” The Fed has kept U.S. interest rates near zero since December 2008 to try to stimulate growth following the worst recession since the Depression.

Benchmark interest rates are 4.75 percent in Australia and 3 percent in New Zealand, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

The British pound jumped 1 percent to $1.6237, its strongest level since January. The Bank of England kept its main interest rate at a record low of 0.5 percent and maintained the size of its bond stimulus plan at 200 billion pounds, as forecast by economists in Bloomberg News surveys.

Sterling was also supported as a report showed house prices erased almost half of the record drop posted the previous month. The average cost of a home increased 1.8 percent from September, when it declined 3.7 percent, mortgage-lender Halifax said in an e-mailed statement today. Property values were unchanged from the same month a year earlier.

ECB Hold-Off

The ECB will leave its refinancing rate at 1 percent today, according to all 55 economists in a Bloomberg News survey. The decision is due at 1:45 p.m. in Frankfurt and ECB President Jean-Claude Trichet will hold a press conference 45 minutes later. The central bank has said it intends to continue withdrawing its emergency measures.

“While the ECB policy announcement today will pass without event, there are a lot of questions in the market with respect to the normalization in ECB policy, particularly in view of the deficit issues, which are presently playing out in Ireland and in Portugal,” Jane Foley, a senior foreign-exchange strategist at Rabobank International in London, wrote in a note today.

The euro’s gains are likely to stall as investors focus on the region’s sovereign-debt crisis, BNP Paribas SA said.

Ireland is preparing next year’s budget and will announce plans for 2011 budget cuts and tax-raising measures by tomorrow. The country last month said it needs 15 billion euros ($21 billion) of savings over the next four years.

There are “specific issues which are likely to weigh on the euro, including the outline of the Irish budget,” BNP analysts led by Hans-Guenter Redeker, global head of currency strategy in London, wrote in a client note today. “While euro- dollar is still likely to push higher in the next few days we would suggest that upside potential is now becoming more limited and we would recommend caution.”

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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