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Dollar Drops on Fed Purchases; Euro Jumps After ECB Holds Rates

Nov. 4 (Bloomberg) -- The dollar fell against its higher-yielding peers after the Federal Reserve said it will buy an additional $600 billion of Treasuries to boost the U.S. economy.

The euro jumped to a nine-month high versus the U.S. currency even as European Central Bank President Jean-Claude Trichet said he had “no indication” that the U.S. is pursuing a policy of weakening the dollar. The ECB kept its benchmark interest rate unchanged at a record low. The pound rose as the Bank of England refrained from adding to its asset purchases.

“We are in the midst of a dollar decline and there’s more to come,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The euro has been a key beneficiary. Quantitative easing is at the center of the currency game at the moment.”

The dollar weakened 0.7 percent to $1.4237 per euro at 11:20 a.m. in New York, from $1.4139 yesterday. It earlier depreciated to $1.4282, the weakest since Jan. 20. Against the yen, the dollar lost 0.5 percent to 80.68. The U.S. currency was 1.9 percent weaker at 79.46 cents per New Zealand dollar and was 1.2 percent weaker at 6.5051 Swedish krona. The yen fell 0.2 percent to 114.86 against the euro.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against those of six major U.S. trading partners including the euro, dropped for a third day, losing 1 percent to 75.751 after touching 75.631, the lowest level since December.

The Standard & Poor’s 500 Index climbed 1.8 percent and touched a six-month high. The Stoxx Europe 600 Index jumped 1.7 percent after sliding 0.4 percent yesterday.

‘Disappointingly Slow’

The Federal Open Market Committee said in its statement yesterday that it was compelled to act because “progress” toward the objectives of full employment and stable prices “has been disappointingly slow.” The Fed has kept U.S. interest rates near zero since December 2008 to try to stimulate growth following the worst recession since the Depression.

There has been “no indication that would change my trust that the Federal Reserve chairman and the Treasury chief aren’t playing a tactic of a weak dollar,” Trichet said at a press conference in Frankfurt. “I have no reason to think that.”

The dollar stayed weaker after a report showed more Americans than forecast filed applications for unemployment benefits last week. Jobless claims rose by 20,000 to 457,000 in the week ended Oct. 30 from a revised 437,000 the prior week, Labor Department figures showed today in Washington. The total number of people receiving unemployment insurance fell, while those on extended payments increased.

‘Ultra Dovish’

The Fed is “ultra dovish and have left the door open to more,” said Kathleen Brooks, research director in London at Forex.com, part of online currency trading firm Gain Capital. “That’s not an environment where the dollar can rally.”

Benchmark interest rates are 4.75 percent in Australia and 3 percent in New Zealand, attracting investors to the South Pacific nations’ higher-yielding assets.

The British pound gained 1.2 percent to $1.6267 and touched $1.6299, its strongest level since January. The Bank of England kept its main interest rate at a record low of 0.5 percent and maintained the size of its bond stimulus plan at 200 billion pounds, as forecast by economists in Bloomberg News surveys.

Sterling was also supported as a report showed house prices erased almost half of the record drop posted the previous month. The average cost of a home increased 1.8 percent from September, when it declined 3.7 percent, mortgage-lender Halifax said in an e-mailed statement today. Property values were unchanged from the same month a year earlier.

ECB Policy ‘Accommodative’

The ECB left its refinancing rate at 1 percent today, as predicted by all 55 economists in a Bloomberg News survey.

“Overall, the current monetary policy stance remains accommodative,” Trichet said. “The stance, the provision of liquidity and the allotment modes will be adjusted as appropriate, taking into account the fact that all the non-standard measures taken during the period of acute financial market tensions are fully consistent with our mandate and, by construction, temporary in nature.”

The euro’s gains are likely to stall as investors focus on the region’s sovereign-debt crisis, BNP Paribas SA said.

Ireland is preparing next year’s budget and will announce plans for 2011 budget cuts and tax-raising measures by tomorrow. The country last month said it needs 15 billion euros of savings over the next four years.

There are “specific issues, which are likely to weigh on the euro, including the outline of the Irish budget,” BNP analysts led by Hans-Guenter Redeker, global head of currency strategy in London, wrote in a client note today. “While euro-dollar is still likely to push higher in the next few days we would suggest that upside potential is now becoming more limited and we would recommend caution.”

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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

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