Dollar Weakens as Fed Joins ECB to Increase Monetary Stimulus

The dollar fell versus most its major counterparts after the Federal Reserve’s plan to begin a third round of asset purchases to bolster the economy raised concern the measure will debase the value of the U.S. currency.

The U.S. currency weakened to a four-month low against the euro and seven-month low versus the yen as the central bank said it will expand its holdings of long-term securities with open- ended purchases of $40 billion of mortgage debt a month. European Central Bank President Mario Draghi said last week that policy makers had agreed on an unlimited debt-buying program for the region. Canada’s dollar and Mexico’s peso advanced as stocks and commodities rallied on increased demand for riskier assets.

“While this and the ECB actions were expected by the markets, it is helping the market to move away from two key risks, namely the financing of the U.S. and peripheral risks in Europe,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “With these twin tail risks disappearing, the market is rushing again to sell the U.S. dollar and move back into equities and, to a lesser extent, credit.”

The dollar fell 0.5 percent to 77.49 yen at 5 p.m. in New York. The U.S. currency lost as much as 0.9 percent, touching the weakest level since Feb. 9. It dropped 0.7 percent to $1.2991 per euro, weakening beyond $1.30 for the first time since May 9. The shared currency rose 0.3 percent 100.67 yen.

Yen Strength

The yen reached a seven-month high versus the dollar, prompting speculation Japanese policy makers may consider market intervention to curb the strength.

Japan’s Vice Finance Minister Takehiko Nakao told reporters in Tokyo today the recent surge in the yen against the dollar has been “obviously speculative” and that Japan can’t overlook such moves.

“The intent is to bring long term U.S. yields down -- that should weigh on dollar-yen and push it lower,” said Greg Anderson, the North American head of G-10 currency strategy at Citigroup Inc. in New York. “The only mitigating factor if equities rally then that helps dollar-yen a little bit. It will put a little bit more pressure on the minister of finance and we’ll see how they respond.”

Japanese Finance Minister Jun Azumi ordered currency intervention on Oct. 31, after the yen strengthened to a post- war record 75.35 per dollar.

Dollar Level

The Dollar Index fell a third day, declining 0.6 percent to 79.255. It touched 79.180, the lowest since May 4.

“The Dollar Index is very oversold, with weekly relative strength indices and stochastic back to 2008-2012 levels, which have preceded explosive rebounds,” Callum Henderson, global head of currency research at Standard Chartered in Singapore, wrote in a note to clients yesterday.

Stochastics, a technical analysis tool based on momentum measures, are often used to identify whether a security’s price is overbought or oversold.

The Dollar Index tumbled 1.3 percent on Nov. 25, 2008 when the central bank first committed funds to quantitative easing. It was little changed on Aug. 27, 2010, when Fed Chairman Ben S. Bernanke hinted intent for a second round of monetary easing in Jackson Hole, Wyoming. It fell 6.8 percent between then and Nov. 1 of that year when the purchases began.

FOMC Report

“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said today in a statement at the end of a two-day meeting in Washington.

The FOMC said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

While the U.S. has “enjoyed broad price stability” since the mid-1990s, the employment situation remains a “grave concern,” Bernanke said at a press conference after the statement. “The weak job market should concern every American.”

Economic Forecast

FOMC participants upgraded their estimate for 2013 gross domestic product growth to 2.5 percent to 3 percent, compared with 2.2 percent to 2.8 percent in June. Estimates for 2014 are from 3 percent to 3.8 percent, versus 3 percent to 3.5 percent in the previous forecast, according to the central tendency forecasts, which exclude the three highest and three lowest of 19 projections.

“The Fed’s actions are very bullish for risk,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. “The idea of targeting a lower unemployment rate promises massive long-standing balance sheet expansion that will probably go well beyond what is seen by other central banks.”

The ruble extended gains against the dollar after the country’s central bank raised the refinancing rate to 8.25 percent from 8 percent, the first increase since April 2011. The overnight auction-based repurchase rate will rise to 5.5 percent from 5.25 percent and the overnight deposit rate to 4.25 percent from 4 percent, effective tomorrow.

The currency rose 0.8 percent to 31.2321 per dollar. It gained 0.7 percent to 40.3204 per euro.

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

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

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.