Dollar Declines as Fed Maintains Pace of Bond Buying Program

The dollar declined for the first time in three days after the Federal Reserve maintained its $85 billion in monthly bond purchases and said that persistently low inflation could hamper the U.S. economic expansion.

The greenback had gained earlier versus the euro and yen as reports showed companies boosted payrolls in July by the most this year and the U.S. economy grew more than projected in the second quarter. Fed Chairman Ben S. Bernanke said this month a reduction in the central bank’s bond-buying program would depend on the economy’s performance. The Australian dollar fell to its weakest level in almost three years on speculation the country’s central bank will cut interest rates.

“They came across as more cognizant that inflation could be lower than anticipated, which would be a risk to the economy,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “While it is dovish, I don’t think it necessarily changes expectations for tapering.”

The Bloomberg U.S. Dollar Index fell 0.1 percent to 1,025.74 at 5 p.m. in New York. It decreased 1.4 percent in July. The U.S. currency dropped 0.3 percent at $1.3302 per euro. The greenback weakened 0.2 percent to 97.88 per yen after touching 98.59.

The euro gained 2.2 percent to the greenback in July, while the yen has appreciated 1.3 percent. New Zealand’s dollar has led all major gainers with a 3.2 percent increase and the Norwegian krone has climbed 3 percent, the second-most. Brazil’s real was the biggest loser, with a 2 percent decline.

Krone, Aussie

Norway’s krone rose versus all but one of its most-traded peers as the country’s unemployment rate unexpectedly dropped in May, damping speculation the central bank will cut interest rates in September. The currency appreciated 0.8 percent to 5.8924 per dollar after reaching 5.8776. It increased 0.5 percent to 7.8381 per euro.

South Africa’s rand declined versus most of its 16 most-traded peers even as the country’s trade gap narrowed for a second month in June. The deficit fell to 7.7 billion rand ($775 million) from 11 billion rand in May, the Pretoria-based South African Revenue Service said in an e-mailed statement today.

The currency weakened 0.8 percent to 9.8768 per dollar. The rand was little changed versus the dollar in July.

Tapering Prospects

“The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

The Fed will probably wait until September to reduce the monthly purchases by $20 billion to a total of $65 billion, according to half of the 54 economists surveyed by Bloomberg News from July 18-22.

“The tone of the FOMC statement was on the dovish side,” Dean Maki, the New York-based chief U.S. economist for Barclays Plc and a former Fed economist, wrote today in a client note. “We view the substantive changes as mainly aimed at separating the decision to taper the pace of asset purchases from that of implementing the first rate hike, rather than signaling that tapering has become less likely.”

U.S. Data

U.S. gross domestic product, the value of all goods and services produced, rose at a 1.7 percent annualized rate, after a 1.1 percent gain the prior quarter, Commerce Department figures showed. The median forecast of 85 economists surveyed by Bloomberg called for a 1 percent advance.

Companies in the U.S. boosted payrolls in July by the most this year as employers grew more optimistic demand will pick up in the second half of the year. The 200,000 increase in employment was more than projected and followed a revised 198,000 gain in June that was higher than initially estimated, according to data today from the ADP Research Institute in Roseland, New Jersey. The median forecast of 40 economists surveyed by Bloomberg called for a July advance of 180,000.

“The better-than-expected nature of the data is considered taper-positive,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said by phone from Washington, before the FOMC statement.

Bond Buying

The central bank said its bond purchases will remain divided between $45 billion a month of Treasury securities and $40 billion a month of mortgage-backed securities. The Fed also will continue reinvesting securities as they mature.

The Fed repeated the pledge it has used since September that it will continue the purchases until the U.S. labor market outlook has improved substantially.

The dollar had strengthened 4.6 percent this year, the second-most behind the euro’s 5.6 percent increase, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The Australian dollar led all decliners with an 11 percent drop, while the yen fell 8.5 percent, the second-most.

The Australian dollar declined to its weakest level in almost three years as speculation the Reserve Bank of Australia will cut borrowing costs next week curbed demand for the currency. Governor Glenn Stevens said yesterday the inflation outlook provided room for additional policy easing.

Stevens’s comments “really left the door open for more easing, and those dovish signs give us more confidence in our view that the RBA will cut rates once again,” said Janu Chan, an economist at St. George Bank Ltd. in Sydney. “The Aussie will weaken from here,” said Chan, who sees the currency at 89 cents by year-end.

The Aussie declined 0.9 percent to 89.82 U.S. cents after dropping to 89.36 cents, the weakest level since September 2010.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Jeff Marshall in New York at jmarshall75@bloomberg.net

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

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