Dollar Climbs Against Euro, Yen as Fed Refrains From Stimulus

The dollar rose to the highest level against the euro in almost a week after the Federal Reserve refrained from taking further steps to stimulate the world’s largest economy, which might have debased the U.S. currency.

The greenback gained versus the yen for the first time in three days after the Federal Open Market Committee said in a statement it will provide additional accommodation as needed amid a slowing economy. Investors had speculated it might signal a third round of asset purchases under quantitative easing. Australia’s dollar dropped from a four-month high as risk appetite ebbed and stocks fell.

“Anybody looking for even a mild outcome of monetary policy easing was disappointed,” Andrew Busch, a global currency strategist at Bank of Montreal (BMO) in Chicago, said. “It continues to be like an absurdist play where we’re all waiting for the Fed to act on QE3 and it never arrives. Given the current state of the economy, there shouldn’t be an expectation the Fed is going to act on quantitative easing.”

The dollar climbed 0.7 percent to $1.2225 per euro at 5 p.m. New York time and touched $1.2218, the strongest since June 26. The greenback rose 0.4 percent to 78.44 yen after falling earlier to 77.91 yen, the lowest since June 1, while the 17- nation currency declined 0.2 percent to 95.89 yen.

The U.S. currency and the euro fell earlier against most major counterparts before the Fed statement and a European Central Bank meeting tomorrow amid mounting evidence that economies around the world are slowing.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, declined 0.2 percent to 82.482 before gaining 0.6 percent to 83.124 after the Fed meeting.

Expecting More

“This dollar action shows that people were expecting a little bit more than what the Fed gave them today,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “There’s more data coming that could give the Fed reason to act. This doesn’t necessarily take away from potential action in the future.”

The pace of hiring in the U.S. in July probably failed to reduce the nation’s 8.2 percent unemployment rate, economists said before a Labor Department report due Aug. 3. The data probably will show employers added 100,000 jobs last month, according to the median forecast in a separate survey of economists. Employers added an average of 226,000 a month from January through March.

The U.S. currency was little changed over the past week against nine developed-nation peers tracked by the Bloomberg Correlation-Weighted Indexes. The yen fell 0.3 percent and the euro lost 0.5 percent, while Sweden’s krona rallied 1.2 percent.

Aussie Drops

Australia’s dollar rose 0.4 percent to $1.0543, the strongest level since March 27, before falling 0.4 percent to $1.0461. South Africa’s rand dropped 1.1 percent to 8.3491 per dollar. The Standard & Poor’s 500 Index fell 0.3 percent after rising 0.4 percent earlier.

The pound slid against all of its 16 most-traded counterparts except the rand 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 0.9 percent to $1.5536 and weakened 0.3 percent to 78.69 pence per euro.

Purchasing managers’ indexes fell worldwide in July, with factory gauges for France, Germany and Austria reaching their lowest levels in more than three years.

Draghi Evidence

The weaker data gives ECB President Mario 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 client note.

Draghi said last week he was prepared to do “whatever it takes to preserve the euro” amid the region’s sovereign-debt crisis.

“The market will be a little cautious to go heavy-handed long dollar into the ECB meeting, even though the risk is that Draghi disappoints the market as well,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. A long position is a wager that a currency will strengthen.

The U.S. central bank said in its statement the economy “decelerated somewhat over the first half of this year.”

Policy makers “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” it said in the statement after a two-day policy meeting in Washington. The Fed reiterated that it will keep interest rates exceptionally low at least through late 2014.

Quantitative Easing

The central bank bought $2.3 trillion of assets in two rounds of quantitative easing between December 2008 and June 2011 to spur the economy. The Dollar Index slid 14 percent during that period.

“Looking at the range of options available to the Fed, logic dictated that the Federal Reserve that they weren’t going make a big change to policy or language today,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “There were some holdouts that were hoping for action and that’s why you go the reaction of stronger dollar and a slight risk-off.

The U.S. central bank has kept its benchmark interest rate at zero to 0.25 percent since December 2008 and is swapping $667 billion in short-term debt in its holdings for longer-term securities through year-end to cap borrowing costs. Traders call the program Operation Twist after a similar effort in the 1960s.

Fed policy makers at their June meeting expanded Operation Twist from $400 billion. They lowered their outlook for expansion and employment, saying they expected economic growth to “remain moderate” over coming quarters before picking up gradually.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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