The dollar slid against the euro and yen before the Federal Reserve begins a meeting today amid prospects policy makers will consider further stimulus measures to sustain U.S. growth.
The euro gained versus most of its 16 major counterparts as Group of 20 leaders meeting in Mexico focused their response to Europe’s financial crisis on stabilizing banks. Spain’s borrowing costs soared to a euro-era record yesterday before the nation sells bills today. Australia’s dollar rose a fourth day after the Reserve Bank said this month’s cut in interest rates followed a “finely balanced” discussion.
“There are some expectations that the Fed may extend the Twist program,” Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore, said about the central bank’s plan to lengthen the maturity of its Treasury holdings. “The Fed may also give some indication that they may do something in the later part of the year. The dollar will come under pressure.”
The dollar declined 0.3 percent to $1.2613 per euro at 8:34 a.m. London time after depreciating to $1.2748 yesterday, the weakest level since May 22. The greenback dropped 0.3 percent to 78.88 yen. Japan’s currency was little changed at 99.53 per euro.
Fed policy makers will bring new forecasts to their two-day meeting starting today as they contend with continuing financial stress in Europe and a U.S. unemployment rate that has remained above 8 percent for 40 consecutive months.
JPMorgan Chase & Co. and Jefferies & Co. predict they will extend the Fed’s so-called Operation Twist. The $400 billion program, which was announced in September and ends this month, involved selling short-maturity debt and buying longer-term bonds.
“A mere extension of Operation Twist may disappoint markets that have been expecting something more aggressive,” said Yuki Sakasai, a currency strategist at Barclays Capital in New York. “That may lead to some selling of risk currencies, and buying back of the dollar.”
The Fed bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy. The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, tumbled 14 percent during that period. The gauge fell 0.3 percent to 81.728 today, after yesterday touching 81.161, the lowest level since May 22.
G-20 leaders are in Los Cabos, Mexico for a second consecutive summit to be dominated by Europe’s debt woes, with Spain’s Prime Minister Mariano Rajoy also attending the talks.
The International Monetary Fund got commitments for $456 billion to be used as a “second line of defense” to resolve and prevent financial crises, Managing Director Christine Lagarde said in a statement.
Spain asked for a bailout of as much as 100 billion euros to prop up its banks on June 9, becoming the fourth member of the euro bloc to request international aid.
Spanish 10-year yields jumped 28 basis points to 7.16 percent yesterday, above the 7 percent rate that pushed Greece, Ireland and Portugal to seek rescue packages. Spain is set to auction 12- and 18-month bills today, followed by an offering of bonds in two days.
“We don’t have a proper firewall to the euro crisis,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia’s second-largest lender. “We’ll probably see Spanish yields continuing to rise. The euro will come under pressure on all fronts.”
The Australian dollar climbed against the dollar after the Reserve Bank of Australia released minutes of its June 5 meeting at which policy makers cut the overnight cash-rate target to 3.5 percent, the lowest since 2009.
“There was clear evidence suggesting a softening in global conditions, and uncertainty about the future in Europe had increased significantly,” minutes released today in Sydney showed.
The so-called Aussie gained 0.2 percent to $1.0144.