Dollar Weakens as Federal Reserve Leaves Door Open to Additional Stimulus

The dollar weakened against most of its major counterparts after Federal Reserve Chairman Ben S. Bernanke kept the door open to doing more to prop up the U.S. economy if necessary, damping demand for the currency.

The greenback fell versus the euro and the yen as the Fed said “significant downside risks” remain even after the economy picked up in the third quarter. While the Fed refrained from action now, the statement spurred speculation it may introduce a third round of debt buying under quantitative easing, debasing the dollar. The euro rose after Greece’s Cabinet backed Prime Minister George Papandreou’s call for a referendum on Europe’s bailout package.

“Bernanke clarified that the real problem is that even though we have some strength in the third and fourth quarter, the medium-term outlook is still quite grim,” said Kathy Lien, director of currency research at the online trading firm GFT Forex in New York. “The mild upgrade to their economic assessment does not eliminate the possibility of QE3, and Bernanke’s statement emphasizes that.”

The dollar fell 0.3 percent to $1.3747 per euro at 5 p.m. New York time, after weakening earlier as much as 0.9 percent. It reached a three-week high $1.3609 yesterday. The U.S. currency depreciated 0.4 percent to 78.05 yen. The Japanese currency rose 0.1 percent to 107.29 per euro.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, slipped 0.3 percent to 77.085.

Stocks Climb

Stocks advanced as investors sought higher-yielding assets. The Standard & Poor’s 500 Index rose 1.6 percent after tumbling 2.8 percent yesterday in its biggest loss since Oct. 3 as risk appetite faded amid turmoil over efforts to curb Europe’s debt crisis.

South Africa’s rand was the biggest winner against the dollar today, gaining 1.4 percent to 7.9944 after slumping almost 5 percent over the previous two days. Canada’s dollar strengthened 0.7 percent to $1.0136 after falling for the past three days.

Bernanke, speaking to reporters after the Federal Open Market Committee ended a two-day meeting, said additional purchases of mortgage-backed securities are a “viable option” if the state of the economy warrants further easing.

“We are prepared to take further action,” Bernanke said at his press conference. “We have the tools to do more if that is appropriate.”

‘Very Aggressive’

At the same time, he said, policy makers already “are being very aggressive” in their approach to bolster the world’s largest economy. The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.” It also will continue a plan to lower borrowing costs by lengthening the maturities of its holdings.

Chicago Fed President Charles Evans dissented, favoring “additional policy accommodation.”

“They still see significant downside risks to the economy, and a lot of this hinges on Europe -- it’s definitely a dovish message,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York.

The central bank previously bought $2.3 trillion in assets in two rounds of quantitative easing to support the economy.

The Fed began a program to purchase $400 billion of longer- term securities through June while selling the same amount of short-term Treasuries. Known as Operation Twist after a similar effort in the 1960s, the plan doesn’t change the size of the central bank’s balance sheet. Additional quantitative easing would increase it and swell the supply of dollars in the market, bringing down the price of the currency.

Pre-Meeting Speculation

Speculation the Fed would take further action had increased after Fed Vice Chairman Janet Yellen, Governor Daniel Tarullo and Evans said last month in speeches more stimulus may be warranted for a U.S. economy too weak to push unemployment below 9 percent.

The U.S. jobless rate held at 9.1 percent for a fourth straight month in October, a Bloomberg survey forecast before the government reports the data Nov. 4. The rate has been at or above 9 percent since April 2009 except for two months early this year. The average for the past decade is 6.4 percent.

The economy strengthened in the third quarter, growing at an annual rate of 2.5 percent, the Commerce Department reported Oct. 27. That compared with 0.4 percent in the first quarter and 1.3 percent from April through June.

Greek Referendum

European leaders urged Papandreou to swiftly spell out how he intends to stick to the terms of the region’s bailout plan after he handed voters a veto over the week-old package.

Crisis talks were under way in the French resort of Cannes on the eve of a Group of 20 summit after Papandreou was summoned by European counterparts to explain his call for a referendum that risks delaying aid the country needs to avert default. In Athens, Greek lawmakers debated a confidence motion that could bring down his government.

China’s vice finance minister, Zhu Guangyao, said it’s “too soon” for the nation to discuss further bond purchases from Europe’s enhanced rescue fund. While there are proposals to revamp the European Financial Stability Facility, “there’s no concrete plans yet, so it’s too early to talk about further investments in these tools,” Zhu told reporters today in Cannes.

The yen strengthened against the dollar today after sliding 3.4 percent over the previous two days. Japan’s government intervened on Oct. 31, selling yen to weaken the currency after it appreciated to a post-World War II high of 75.35 per dollar.

The Japanese currency tends to strengthen in periods of financial turmoil because the nation’s current-account surplus makes it less reliant on foreign capital.

The yen dropped the most in the past week against the currencies of nine developed-nation counterparts, falling 1.5 percent, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar appreciated 3.3 percent and the euro added 0.1 percent.

To contact the reporter on this story: 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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