Dollar Weakens on Concern Central Bank Will Add to Treasury Purchase Plan

The dollar weakened against most major counterparts amid speculation the U.S. central bank will expand monetary easing to keep the economy from slipping back into recession.

The dollar reached a three-week low against the yen. Federal Reserve policy makers will meet on Dec. 14 to review a plan to buy $600 billion in Treasuries through June, after central bank Chairman Ben S. Bernanke said an increase in the purchases was “possible.” The yen erased gains as Asian stocks rebounded, damping demand for Japan’s currency as a refuge.

“The dollar sell-off is coming back in the markets as the Fed said it may expand the bond purchases, increasing uncertainty about the U.S. economy,” said Kengo Suzuki, manager of the foreign bond department in Tokyo at Mizuho Securities Co.

The dollar slipped 0.5 percent to $1.3369 per euro at 8:21 a.m. in London from $1.3308 in New York yesterday, when it touched $1.3442, the lowest since Nov. 23. The greenback was at 82.64 yen from 82.66 yen, after reaching 82.34 yen, the lowest since Nov. 12. The yen was at 110.46 per euro from 110.

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, fell 0.3 percent to 79.349.

President Barack Obama said he would agree to sustain tax cuts for high-income taxpayers in exchange for extending federal unemployment insurance.

‘Rock and Hard’

“The U.S. dollar is caught between a rock and a hard place at the moment,” David Forrester, a currency economist at Barclays Capital in Singapore, said on Bloomberg Television. The extension of the President George W. Bush-era tax cuts “places less of an onus on monetary policy to actually stimulate the economy. Which is good news; less of a chance of an extension of QE2. But you do have Bernanke out there continuing to be dovish.”

The yen erased early gains as the MSCI Asia Pacific Index of regional shares rose 0.3 percent. The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, climbed 0.8 percent, after dropping as much as 1.7 percent.

Demand for the euro may be limited as European finance ministers ruled out immediate aid for Portugal and Spain or an increase in the 750 billion-euro ($1 trillion) crisis fund.

Luxembourg Prime Minister Jean-Claude Juncker said late yesterday after chairing the ministers’ meeting that his group would “do everything to secure the financial stability in the euro zone.”

Europe’s Crisis

Ireland’s parliament will vote today on its budget, which must be passed for 85 billion-euro aid package to go into effect. European Central Bank Vice President Vitor Constancio will deliver a speech at a conference in Paris today.

“I can’t be bullish on the euro,” said Daisaku Ueno, president in Tokyo at Gaitame.com Research Institute Ltd., a unit of Japan’s largest currency margin company. “The crisis won’t ease anytime soon, as officials’ opinions have been divided over how to deal with it. This may deteriorate the region’s economic fundamentals next year as well.”

The euro has declined 9.3 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar is down 1.8 percent, while the yen has gained 12 percent.

Australia’s currency rose 0.3 percent to 99.25 U.S. cents from 98.99 cents, after dropping 0.3 percent yesterday. It fetched 82.05 yen from 81.82 yen.

Reserve Bank of Australia Governor Glenn Stevens and his board left the overnight cash rate target at 4.75 percent today as Australia’s growth slows and risks to the global economic recovery persist.

“Increasingly, the risks are that now the RBA will be sidelined till the middle of 2011,” said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada. “The Aussie’s direction is going to be dependent on European peripheral developments.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@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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