Dollar Declines as Fed Signals It’s Prepared to Stimulate

The dollar weakened to a six-week low against the euro after minutes of the Federal Reserve’s latest policy meeting showed officials remain supportive of more stimulus unless the economy shows signs of expansion.

The greenback strengthened earlier with the yen after Japan reported a wider-than-estimated trade deficit in July. The euro advanced as Greek Prime Minister Antonis Samaras said in Athens his government was determined to meet all bailout targets and exit the sovereign-debt crisis. The dollar weakened below $1.25 per euro and reversed a gain against the majority of its most- traded counterparts on concern additional stimulus would debase the currency.

“The text was reasonably clear in suggesting that more stimulus is potentially coming and coming quite soon,” Jens Nordvig, managing director of currency research and global head of foreign-exchange strategy at Nomura Holdings Inc. in New York, said in a telephone interview. Expectations for “the quantitative-easing idea had been pushed out in the future. That was a little bit of a surprise and that’s the reaction you’re seeing in the dollar.”

The U.S. currency fell 0.5 percent to $1.2529 per euro at 5 p.m. New York time after touching $1.2538, the weakest level since July 5. It declined 0.9 percent to 78.58 yen. Japan’s currency rose 0.4 percent to 98.45 per euro.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the record of the Federal Open Market Committee’s July 31- Aug. 1 gathering released today in Washington.

Record Stimulus

Policy makers said after the meeting that they will step up record stimulus if needed to spur growth and cut a jobless rate stuck above 8 percent since February 2009. Chairman Ben S. Bernanke will have an opportunity to clarify his views in an Aug. 31 speech at a forum for central bankers in Jackson Hole, Wyoming, where he signaled a second round of bond buying by the Fed in 2010. Fed officials next meet on Sept. 12-13.

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt between 2008 and 2011 in two rounds of quantitative easing to cap borrowing costs. Policy makers have held the Fed’s key rate in a range of zero to 0.25 percent since 2008 and plan to keep it there at least through late 2014.

‘Stale’ Minutes

The minutes were more “stale” than usual, said Andrew Cox, a currency strategist at Citigroup Inc. (C) in New York, since better than expected economic data in the U.S. has emerged since the meeting and optimism has grown that the European Central Bank will take steps to address the EU’s debt crisis.

“The trajectory of U.S. economic data has improved quite a bit,” Cox said by Bloomberg instant message. “Further, the perception of euro-zone specific systemic risk has eased substantially.”

Payrolls in the U.S. increased 163,000 in July following a revised 64,000 rise the previous month that was less than initially reported, Labor Department figures showed Aug. 3 in Washington, even as unemployment rose to 8.3 percent.

Purchases of previously owned houses, tabulated when a contract closes, increased 2.3 percent to a 4.47 million annual rate, figures from the National Association of Realtors showed today in Washington. The data were posted on the group’s website ahead of the usual 10 a.m. release time. The median forecast of 73 economists surveyed by Bloomberg called for a rise to a 4.51 million rate.

Housing ‘Bottom’

“There are still some people with hope, with the perception, that we’ve hit the bottom of the housing of the market,” Brian Taylor, chief currency trader at Manufacturers & Traders Trust in Buffalo, New York, said in a telephone interview.

The Dollar Index, which IntercontinentalExchange Inc. (ICE) uses to track the U.S. currency against those of six major trading partners, fell 0.5 percent to 81.509 after climbing as high as 82.121.

The dollar has advanced 6.6 percent in the past 12 months, the best performance after the Australian dollar of the 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes. The yen gained 2.2 percent, and the euro weakened 8 percent.

Trade Deficit

The yen strengthened against all of its major peers as Japan’s trade deficit was 517.4 billion yen last month, following a revised 60.3 billion yen surplus in June, the Finance Ministry said in Tokyo. The median forecast in a Bloomberg News survey of economists was for a shortfall of 270 billion yen. Exports fell 8.1 percent from a year earlier, compared with an estimated 2.9 percent decline.

Purchasing managers reports tomorrow are forecast to show contraction in German and French manufacturing, with the measure for the euro-area as a whole also predicted to shrink, according to surveys conducted by Bloomberg News.

The shared currency gained against the majority of its most-traded counterparts as Samaras told Luxembourg Prime Minister Jean-Claude Juncker, head of the euro group of finance ministers, that Greece is speeding up reforms.

German Chancellor Angela Merkel earlier signaled that she’s willing to discuss a Greek request for more time to meet the terms of its international rescue, leaving the door open to potential concessions. Merkel spoke in the Moldovan capital Chisinau before meeting with Samaras in Berlin on Aug. 24.

Euro, Aussie

The euro may be poised to strengthen against the Aussie if it breaches the 50-day moving average of A$1.1962, according to Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York.

The shared currency rose 0.3 percent to A$1.1927 today after falling from A$1.3031 on May 18.

“It’s definitely one to look for a turnaround,” Galy said in a telephone interview. “It’s partly technical, just based on the positioning. It’s also that Aussie has been massively bought in the past weeks, so there’s natural tendency for it to come down.”

Societe Generale also forecasts the Aussie declining against the dollar, to 98 U.S. cents at the end of the third quarter and 95 U.S. cents by Dec. 31.

Australia’s currency rose 0.2 percent to $1.0505, and dropped 0.7 percent to 82.55 yen.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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