Dollar Weakens to One-Month Low as Fed Extends Rate Target to Late 2014

The dollar reached the weakest level in a month against the euro after the Federal Reserve extended its pledge to hold its target for the federal funds rate low until late 2014 amid a “highly accommodative” monetary policy.

The central bank had previously pledged to keep its rate target in place until mid-2013. The U.S. currency briefly pared losses after nine of 17 Fed officials expect borrowing costs will remain below 1 percent at the end of 2014, the Fed disclosed, with six officials expecting zero rates to remain into 2015. The euro fell versus most its major counterparts earlier after the European Central Bank was said to oppose restructuring its Greek bonds. New Zealand’s dollar remained higher versus its U.S. counterpart as the nation’s central bank held the target lending rate at 2.5 percent.

“Late 2014 is much longer than the market had expected and that’s why we’re seeing a negative U.S. dollar reaction,” said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “They are assuring markets that rates will remain low, assure businesses that rates won’t go up soon and spur some economic gains.”

The dollar fell 0.5 percent to $1.3106 per euro at 5 p.m. in New York, after reaching $1.3121, the weakest level since Dec. 21. The U.S. currency rose 0.1 percent to 77.78 yen after rising as much as 0.8 percent. The euro added 0.7 percent to 101.94 per yen.

Goldman Trade

Goldman Sachs Group Inc. recommended establishing a long position on the euro against the dollar, targeting $1.38, with a stop if it closes below $1.29. The shared currency will appreciate as economic growth improves in the region, leaders make progress on a closer fiscal compact and as the Fed keeps interest rates low for longer, Thomas Stolper, London-based chief foreign-exchange strategist, wrote in a note to clients. A long is a bet the price of an asset will rise.

“The Committee expects to maintain a highly accommodative stance for monetary policy,” the Federal Open Market Committee said in a statement released in Washington today. “Economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

FOMC Views

The projections by Federal Open Market Committee participants, released for the first time today in Washington, provide an unprecedented look at policy makers’ plans for the path of the benchmark interest rate, which has remained near zero since December 2008. An increase in 2014 would mark the first rise in the fed funds rate since June 2006.

Policy makers also lowered their estimates for growth and inflation in 2012, a move consistent with their statement earlier today that interest rates will remain “exceptionally low” through at least late 2014.

“The statement may have pushed expectations too dovish and the fact that we have the center of mass of the expectations to the left of 2015, that’s what’s catalyzing this reversal,” said Andrew Cox, a currency strategist at Citigroup Inc. in New York.

Fed Chairman Ben S. Bernanke, speaking at a news conference after the statements, said that the option of further large- scale bond purchases is still “on the table.”

Inflation Path

“If inflation is going to remain below target for an extended period and employment progress” is very slow, then “there is a case” for additional monetary stimulus, he said.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.4 percent to 79.481. It reached 79.381, the lowest level since Dec. 21.

“You’ve seen the dollar sell off quite aggressively on this announcement,” said Kathy Lien, director of currency research with online trading firm GFT Forex in New York. “That they’ve extended their low rate pledge only increases the possibility that in March or April we could see the Federal Reserve introduce more quantitative easing.”

The yen fell against most its major counterparts after the Ministry of Finance said Japan’s exports dropped 8 percent in December from a year earlier. The median estimate of 27 economists surveyed by Bloomberg News was for a 7.4 percent decline. The Japanese currency is viewed as a safe haven because the nation’s trade surplus makes the currency attractive because it means the nation doesn’t have to rely on overseas lenders.

Yen Weakness

The yen has fallen 1.9 percent in the past week against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar has depreciated 0.9 percent while the euro has gained 0.3 percent.

Australia’s dollar was the best performer against the greenback and rose to a 12-week high versus the yen after one of the Reserve Bank’s measures of underlying inflation gained more than estimated, boosting speculation the central bank may have less scope to cut borrowing costs.

Australia’s dollar climbed 1.2 percent to 82.43 yen after earlier advancing to 82.48, the highest level since Nov. 1. The Aussie dollar was 1 percent higher at $1.0597.

The MSCI Global Index (SPX) of stocks rose 0.6 percent and the Standard & Poor’s 500 Index gained 0.6 percent.

While the ECB faces pressure to join private-sector investors in taking losses on Greek securities, the central bank sees this as potentially damaging to confidence in the institution, according to two people familiar with the Governing Council’s stance, who declined to be identified because the matter is confidential. The accord is tied to a second financing package for the cash-strapped country, which faces a 14.5 billion-euro bond payment on March 20.

Greek Debt

“The bond holders seem to be splitting hairs about taking a big loss or a bigger loss that is bringing on another wave of nervousness to the market,” said Andrew Wilkinson, chief economic strategist at Miller Tabak in New York. “By this point we don’t think that a Greek default will send Europe in to a tailspin so the euro won’t be tumbling to $1.20.”

The cost to protect against a drop in the euro against the dollar increased for a fourth day. Risk-reversal rates for three-month options on the euro versus the dollar were negative 1.77 percent today compared with negative 1.65 percent yesterday. It has climbed from as low as negative 4.4 percent in November.

New Zealand’s central bank left interest rates at a record low as inflation slows and concern mounts that Europe’s debt crisis may stall global demand for the nation’s commodity exports. The kiwi rallied 0.6 percent to 81.68 per greenback.

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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