Dollar Declines as Fed Adopts More Treasuries-Buying Stimulus

The dollar fell against the euro after the Federal Reserve added to its monetary-stimulus program by announcing plans to buys more Treasuries, renewing concern the measures will debase the U.S. currency.

The U.S. currency weakened versus most of its major peers after the central bank tied its policies to economic benchmarks and said it will buy an additional $45 billion of Treasuries a month, adding to its third round of quantitative easing, and matching economists’ forecasts. The yen fell to the weakest in eight months versus the dollar as Japan’s Liberal Democratic Party, which has pledged fiscal stimulus to stoke economic growth, leads in polls before Dec. 16 elections.

“The market tends to have that kind of reaction when an action is perceived as more quantitative easing,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA (ACA), said in a telephone interview. “Even though we saw the dollar fall, any weakness in the dollar will generally be capped by safe-haven flows.”

The dollar declined 0.5 percent to $1.3074 per euro at 5 p.m. in New York, reaching the lowest since Dec. 5. The euro gained 1.4 percent to 108.86 yen. The Japanese currency lost 0.9 percent to 83.26 per dollar, reaching the lowest level since April 2.

Yen Trade

“Dollar-yen is holding above 83, which is quite remarkable given that the Fed just eased policy,” Marc Chandler, New York- based global head of currency strategy at Brown Brothers Harriman & Co., said in a telephone interview. “If you would’ve told most people the Fed would announce aggressive QE, they would’ve expected the dollar to get sold off across the board.”

The central bank linked the outlook for its main interest rate to unemployment and inflation.

“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Fed Chairman Ben S. Bernanke said in a press conference in Washington today after a meeting of the Federal Open Market Committee. The Fed plans to “maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability,” he said.

The Fed said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent. The committee “views these thresholds as consistent with its earlier date-based guidance.”

Fed Plans

A Fed program known as Operation Twist, which was designed to hold down borrowing costs by lengthening the average maturity of the Fed’s holdings, will expire at year-end. The central bank kept its target rate for overnight loans between banks between zero and 0.25 percent since December 2008 to spur economic growth.

The nation also faces a fiscal cliff of $607 billion in automatic spending cuts and tax boosts starting Jan. 1 if lawmakers can’t reach agreement. That would cause the economy to contract 0.5 percent next year, according to the Congressional Budget Office.

The greenback gained 0.1 percent against the euro on Oct. 24 after Fed policy makers announced they would maintain mortgage security purchases of $40 billion a month. Two previous rounds of quantitative easing totaling $2.3 trillion failed to breathe life into the labor market.

Policy Outlook

“The dollar found another negative in that the Fed kept some of its powder dry, signaling it had other monetary tools at its disposal,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., wrote today in a note to clients. “But since today’s actions by the Fed didn’t represent a marked change in the foreseeable course for Fed policy, the dollar might soon regain composure, once the dust settles.”

In Japan, LDP leader and former premier Shinzo Abe has called for a doubling of the central bank’s inflation goal to 2 percent and “unlimited” easing to end more than a decade of falling prices. The Bank of Japan (8301) is due to a hold a monetary policy meeting on Dec. 19-20.

The 17-nation euro rose as former Italian Prime Minister Silvio Berlusconi offered to drop his plans to run for premier on the condition that Italian Premier Mario Monti agrees to enter the election campaign and lead a coalition of “moderates.”

The euro was already rising on Berlusconi’s comments before the FOMC news, said Chandler of Brown Brothers Harriman.

Technical Strength

The euro may strengthen against its U.S. counterpart to $1.3490, its highest level since Dec. 2, 2011, if it closes the week above a so-called retracement level of $1.30, according to Richard Adcock, head of fixed-income technical strategy at UBS AG in London.

The Swiss franc’s rebound from a three-month low against the euro shows that even bank charges for deposits and a lull in Europe’s debt crisis can’t deter demand for the currency.

The Zurich-based Swiss National Bank will keep its franc ceiling at 1.20 per euro tomorrow, according to all 14 analysts in a Bloomberg News survey. While the currency weakened after Credit Suisse Group AG said on Dec. 3 it would set negative rates for franc cash balances, it pared almost all those losses in a three-day run of gains.

China’s yuan weakened versus all but one of 24 emerging markets currencies on speculation the People’s Bank of China is limiting gains in the currency to aid exporters.

The currency depreciated 0.1 percent to 6.2515 per dollar after earlier falling to 6.2566, its lowest level since Oct. 23. This marked the third straight day of decline for the yuan.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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

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