BLBG: Dollar Weakens Beyond $1.30 as Fed Commits Up to $800 Billion
By Ye Xie and Michael J. Moore
Nov. 25 (Bloomberg) -- The dollar weakened beyond $1.30 per euro for the first time in almost three weeks after the Federal Reserve committed up to $800 billion to thaw the flow of credit.
The move by the central bank encouraged traders to sell the dollar, which reached a 2 1/2-year high against an index of the currencies of six major U.S. trading partners last week as investors sought refuge from deepening credit losses. The South Africa rand and the New Zealand dollar advanced on speculation investors will resume purchasing higher-yielding assets.
“Our bias for this week at least is for the dollar to be softer,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “It’s a large and substantial policy response in terms of the size of the numbers they’re talking about.”
The dollar dropped 0.6 percent to $1.3025 at 10:25 a.m. in New York, from $1.2953 yesterday, in the biggest three-day decline since the euro’s inception in 1999. The dollar fell 1.8 percent to 95.63 yen, from 97.34. The yen increased 1.4 percent to 124.53 per euro from 126.08.
The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.
“It’s not great news for the dollar, which is an anti-risk currency,” said Dustin Reid, director of currency strategy at RBS Global Banking & Markets in Chicago.
Dollar Index
The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 1.2 percent to 85.065 today, following a 2.4 percent drop yesterday. The index touched 88.463 on Nov. 21, the highest since April 2006.
The New Zealand’s dollar rose 0.7 percent to 55.33 U.S. cents, and the rand gained 3.2 percent to 9.766 per dollar.
“I think there are some early signs of stability and normalization starting to come back into the foreign-exchange markets,” said Robert Sinche, New York-based head of global currency strategy at Bank of America Corp., in an interview on Bloomberg Radio “For us, it means some pretty significant setbacks for the dollar.”
Citigroup received this week a U.S. government rescue package that shields the bank from losses on $306 billion of toxic assets and injects $20 billion of capital. Financial institutions around the world are facing $968 billion in losses on securities tied to home mortgages.
Growth Outlook
The Organization for Economic Cooperation and Development cut its forecast for global growth in 2009. The economy of the organization’s 30 members will contract 0.4 percent next year, after expanding 1.4 percent this year. Earlier this month, it had predicted a 0.3 percent contraction.
Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July to September, more than the government’s earlier estimate of a 0.3 percent contraction, the Commerce Department said in Washington. The decrease matched the median forecast of 71 economists surveyed by Bloomberg News.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net
