Dollar Climbs as Fed Stimulus Fuels Economic Concern, Refuge Bid

The dollar rose against all of its major counterparts after the Federal Reserve’s plan to shift holdings of Treasuries to keep the economy from falling into recession increased the refuge appeal of the currency.

Brazil’s real and South Africa’s rand were the biggest losers against the greenback as stocks and commodities tumbled. The U.S. currency rallied as the Federal Open Market Committee acted to increase holdings of longer-maturity Treasuries and reinvest in mortgage securities in a bid to limit borrowing costs and boost economic growth and jobs. Canada’s dollar traded above parity for the first time in more than a week the euro fell to a 10-year low against the yen.

“This is a safe-haven currency and their worry about the significant risks to the downside for the economy are dollar bullish,” said Jessica Hoversen, a New York-based analyst at the futures broker MF Global Holdings Ltd. “The economic backdrop is still negative and there is still confusion over what is going to happen in Europe.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 1 percent to 77.803 at 5 p.m. in New York.

The dollar rose 0.9 percent to $1.3573 per euro. The 17- nation currency weakened 1 percent to 103.76, the lowest level since 2001. The greenback was little changed at 76.46 yen.

Fed Twist

The Fed said it will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less. About 32 percent of the purchases will be in Treasuries maturing from six- to eight-years. The Fed will also reinvest maturing mortgage debt into mortgage-backed securities instead of Treasuries.

“The markets were looking for some easing and they got it in the form of this operation to extend the duration of the Fed’s Treasury holdings.” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Since we didn’t get QE3, it should not damage the dollar significantly and we’re seeing a modest bounce in the greenback.”

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed statement said.

The action is intended to “put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said in a statement. Three officials dissented, the same as at the prior meeting in August.

Helping Out

“The Fed believes the economy really needs some help, even though inflation is not zero,” said Andy Richman, who oversees $10 billion as a strategist in Palm Beach, Florida for SunTrust Bank’s private wealth management division. “Some of the language in the statement was disconcerting to some people, and that’s why we are seeing some of the selling in equities. The message is the Fed really things the economy needs help, and that is not comforting.”

The Standard & Poor’s 500 Index fell 2.9 percent. The S&P GSCI Index of raw materials declined 0.8 percent.

The Canadian currency traded above parity with the U.S. dollar for the first time since Sept. 12. Canada’s dollar fell 1.6 percent to 1.0081 per dollar, from 99.27 cents yesterday.

South Africa’s rand fell 6.7 percent to 8.2521 per dollar, from 7.7371. Brazil’s real slumped 5.1 percent to 1.8756, from 1.7855.

Economic Downgrade

The International Monetary Fund said yesterday that the world’s largest economy will expand 1.5 percent this year, down from the 2.5 percent projected in June and lowered its forecast for 2012, citing unresolved debt-reduction concerns and waning confidence among consumers and businesses.

The yen rose to as high as 76.12 per dollar before the statement after breaking through so-called resistance near 76.35, according to Junichi Ishikawa, a Tokyo-based market analyst at IG Markets Securities Ltd.

Japanese Finance Minister Jun Azumi told reporters in Tokyo today he’s closely watching markets and will take “bold” action on currencies if needed.

The Swiss franc fell versus the euro as Ernst Baltensperger, an adviser to the Swiss National Bank, said he considers it possible that policy makers will soon increase the franc ceiling versus the euro to 1.25, the newspaper reported, citing an interview.

The franc lost 0.5 percent to 1.2215 per euro after reaching 1.2327, the weakest since July 5. It fell 1.4 percent to 90 centimes per dollar, after touching 89.87 centimes, the weakest level since April 20.

Swiss central bank spokesman Walter Meier in Zurich declined yesterday to comment when asked about speculation that policy makers may adjust the franc ceiling against the euro.

The dollar had declined 1.2 percent this year against the nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes before the statement. The euro has increased 0.3 percent and the yen has gained 5.5 percent.

To contact the reporter 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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