The dollar fell against most major counterparts amid speculation the Federal Reserve may signal further monetary stimulus or extend its pledge to keep interest rates at virtually zero.
The euro erased an earlier gain versus the dollar after Bundesbank President Jens Weidmann said the European Central Bank, which meets tomorrow, shouldn’t exceed its inflation- fighting mandate. ECB President Mario Draghi pledged last week to do whatever it takes to preserve the 17-nation currency. The pound slid following a report that showed U.K. manufacturing shrank. New Zealand’s dollar and Brazil’s real climbed.
“Currencies have had good moves in the direction of improved risk sentiment in the last week or so, and that’s been exclusively driven by greater hopes that the Fed could act today and Draghi’s comments that the ECB will backstop the euro,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in a telephone interview. “A lot of people expect a statement adjusting target horizon guidance from the end of 2014 to mid-2015.”
The dollar was little changed at $1.2295 per euro at 12:52 p.m. New York time after weakening earlier as much as 0.3 percent and strengthening as much as 0.2 percent. The 17-nation currency traded little changed at 96.14 yen. The dollar rose 0.1 percent to 78.20 yen.
The U.S. currency weakened 1.5 percent over the past week against nine developed-nation peers tracked by the Bloomberg Correlation-Weighted Indexes. The yen also fell 1.5 percent, while Sweden’s krona rallied 1.8 percent.
The Fed will issue a statement at about 2:15 p.m. after a two-day meeting. While policy makers refrained from introducing a third round of asset purchases under a strategy known as quantitative easing at their June meeting, Chairman Ben S. Bernanke indicated it’s an option.
The U.S. central bank bought $2.3 trillion of securities in two rounds of asset purchases from 2008 to 2011 in a bid to spur growth, and it has said its benchmark interest rate will stay at “exceptionally low levels” at least through late 2014.
“The dollar is under pressure against high-yielders,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “The market is betting on some form of very gentle easing from the Fed, probably through guidance from the Fed.”
The euro rose 1.4 percent last week as Draghi pledged to protect it. He has a proposal that involves the European Financial Stability Facility buying government debt on the primary market, buttressed by ECB purchases on the secondary market to ensure lenders transmit its record-low interest rates, two central bank officials said on July 27 on condition of anonymity.
European governments “overestimate the central bank’s possibilities and expect too much of it by assuming that it can be used not only for price stability, but also for promoting growth, reducing unemployment and stabilizing the banking system,” Weidmann said in an interview with former central bank chief Helmut Schlesinger. It was conducted on June 29 and published on the Bundesbank’s website today.
Purchasing managers’ indexes fell worldwide in July, with factory gauges for France, Germany and Austria reaching their lowest levels in more than three years.
The weaker data gives Draghi “all the evidence he needs” to make a political push for non-standard fiscal measures, Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, wrote today in a note to clients.
The pound slid against all of its most-traded counterparts after a gauge of factory output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, fell to 45.4 from a revised 48.4 in June. It was the lowest in 38 months.
Sterling lost 0.5 percent to $1.5597 and weakened 0.5 percent versus the euro to 78.83 pence.
China’s yuan halted a four-day gain as manufacturing data trailed economists’ estimates, adding to concern the nation’s growth is slowing.
The currency fell 0.09 percent to close at 6.3685 per dollar in Shanghai, according to the China Foreign Exchange Trade System.
Sweden’s krona surged to the strongest in three months against the dollar after Stockholm-based Swedbank AB (SWEDA) said an index of manufacturing based on responses from about 200 purchasing managers rose.
The krona advanced as much as 0.9 percent to 6.7411 per dollar, the strongest level since May 3, before trading at 6.7635, up 0.5 percent.
Higher-yielding currencies gained on speculation the Fed will signal additional stimulus measures.
Brazil’s real rose 0.8 percent to 2.0398 to the greenback. New Zealand’s dollar touched 81.44 U.S. cents, the highest level since May 2, before trading at 81.23 cents, up 0.5 percent.