Dollar Weakens as Fed Says It Will Keep Buying Bonds

The dollar fell to the weakest since November 2011 versus the euro after the Federal Reserve said it will keep buying $85 billion of securities a month to spur the economy, adding to concern the U.S. currency is being debased.

The greenback slid for a second day against Europe’s shared currency as the Federal Open Market Committee said it will continue to purchase Treasuries and mortgage bonds as the U.S. economy paused and inflation remained below policy makers’ goal. The euro gained earlier as European economic confidence climbed, while the yen slid versus most major counterparts.

“This signals a continuation of current policy,” Vassili Serebriakov, a currency strategist at BNP Paribas SA in New York, said of the Fed. “There’s nothing in the recent data to suggest that labor market conditions are improving, which is what the Fed is looking for. This is one of the situations where there’s more of an excuse than a reason to sell the dollar.”

The U.S. currency dropped 0.6 percent to $1.3567 per euro at 5 p.m. in New York and reached $1.3587, the weakest level since November 2011. The greenback advanced 0.4 percent to 91.08 yen after touching 91.41 earlier, the strongest since June 2010. The euro touched 123.86 yen, the strongest level since May 2010, before trading at 123.57, up 1 percent.

The Fed repeated that its purchases will continue “if the outlook for the labor market does not improve substantially.” The central bank also left unchanged its statement that it planned to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and projected inflation stays below 2.5 percent.

Market Expectations

“This was almost exactly what the market was expecting and similar to the statement they put out in December,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, said in a telephone interview. “They maintained their purchases, the pace and the guidance for the federal funds rate and some other metrics. In general, we got exactly what the market was looking for.”

The FOMC, in a statement after its first meeting of 2013, said that while “strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook.”

The New Zealand dollar fell versus most major peers as the nation’s central bank extended a period of record-low interest rates that began almost two years ago. The currency pared losses as Reserve Bank of New Zealand Governor Graeme Wheeler said in a statement policy makers expect economic growth to strengthen this year.

The kiwi, as the currency is nicknamed, was down 0.4 percent to 83.59 U.S. cents after dropping as much as 1.2 percent to 82.94 cents.

Aussie Slides

Australia’s dollar was the worst performer among the greenback’s 16 most-traded counterparts, depreciating 0.5 percent to $1.0418.

The Brazilian real fell for the first time in six days against the greenback as Finance Minister Guido Mantega said a weaker currency helps the nation’s industry. It dropped as much as 0.7 percent, its biggest intraday slide since Dec. 17, to 1.9999 per dollar before trading at 1.9887, down 0.1 percent.

The euro advanced earlier against most major counterparts after an index of executive and consumer sentiment in the 17- nation currency bloc rose to 89.2 from a revised 87.8 in December, the European Commission in Brussels said today. That’s the highest since June.

Clouds Lifted

The shared currency gained 4.7 percent versus the dollar over the past three months amid speculation the worst of Europe’s three-year-old sovereign-debt crisis is over. European Central Bank President Mario Draghi said on Jan. 22 the “darkest clouds” over the currency bloc have lifted due to decisive policy steps last year.

The euro may strengthen further against the dollar as the region’s economy exceeds forecasts, according to Alan Ruskin, global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG in New York. He spoke in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene.

The yen lost 12 percent since late October as its haven appeal ebbed amid increasing risk appetite and as Prime Minister Shinzo Abe, who took office last month, has pushed for “bold monetary policy” to weaken the currency and defeat deflation.

The dollar extended losses against the euro after the Fed issued a statement following a two-day meeting. Economic growth “paused in recent months, in large part because of weather- related disruptions and other transitory factors,” the policy- setting FOMC said.

Unexpected Standstill

The U.S. economy unexpectedly came to a standstill in the fourth quarter as the biggest plunge in defense spending in four decades swamped gains for consumers and businesses, data showed.

Gross domestic product declined at a 0.1 percent annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department figures showed today. The Bloomberg poll’s projection was for a 1.1 percent increase.

The Fed said after its December meeting it would add $45 billion in monthly Treasury purchases to the $40 billion in mortgage bonds it was buying to spur the economy. It’s the central bank’s third round of asset purchases under the quantitative-easing stimulus strategy.

The central bank bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds.

Policy makers also have held their benchmark interest rate at zero to 0.25 percent since 2008 to fuel growth and reduce unemployment.

The jobless rate held steady at 7.8 percent in January, economists in a Bloomberg survey forecast before the U.S. reports the data Feb. 1. Unemployment has persisted at that level or higher since January 2009. It was 4.4 percent in October 2006.

U.S. consumer prices rose 1.7 percent in 2012, Labor Department data showed on Jan. 16. The Fed’s goal is 2 percent.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Taylor Tepper in New York at ttepper2@bloomberg.net

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

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