The dollar hit a two-month low on Thursday after its biggest one-day fall in at least 25 years when the U.S. Federal Reserve announced it would buy long-dated debt, a move that also lifted stock markets sharply. The Fed's action raised risks that a sharp expansion of the Fed's balance sheet, which has already doubled in the past six months, would eventually lead to oversupply of the world's main reserve currency. U.S. Treasury yields fell and European credit spreads tightened, but the announcement also sparked optimism that the battered U.S. economy could soon begin to recover. Share prices responded positively along with prices of crude oil and industrial metals. The Federal Reserve said it would buy $300 billion of long-dated Treasuries over the next six months, its first large-scale purchases of government debt since the early 1960s, while also boosting buying of mortgage-backed securities and agency debt in its bid to rescue the economy. [ID:nN18343369] It floated the idea of buying Treasuries some time ago but then seemed to go cold on the idea. The sudden change of direction took most investors completely by surprise. The move also effectively amounts to the Fed printing money -- and is hence bad news for the dollar. The dollar index .DXY, a gauge of its performance against a basket of major currencies, fell 1.1 percent to 82.911 after a 3 percent slide on Wednesday -- its biggest one-day drop in at least a quarter of a century. "It's all part of a global process of easing which is positive for risk assets in the short-term," said Nick Parsons, head of markets strategy at National Australia Bank. "The one factor supporting the dollar over the last three months has been the woeful performance of equity markets and if this sees a lift in risk appetite ... that is absolutely, unequivocally negative for the dollar." World shares jumped as investors moved away from the dollar to grab equities following the Fed announcement that sparked optimism the battered U.S. economy could soon begin to recover.

Source