The dollar headed for a record weekly drop against the euro after the Federal Reserve ramped up supply of the currency by unexpectedly saying it will start buying Treasuries. The greenback traded near a two-month low versus the European currency and headed for a second weekly decline versus the yen as the Fed said March 18 its balance sheet will grow by as much as $1.15 trillion as it buys up to $300 billion of government debt and purchases more mortgage bonds. Australia and New Zealand’s dollars gained, heading for a third weekly advance, as prices of commodities the South Pacific nations export surged. “The Fed is massively expanding the supply of dollars by buying government debt,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp., Australia’s biggest lender by market value. “They’re effectively printing money; we regard this as profoundly bearish for the dollar.” The dollar traded at $1.3659 per euro as of 12:10 p.m. in Singapore from $1.3665 yesterday, when it touched $1.3738, the weakest level since Jan. 9. The U.S. currency lost 5.4 percent this week, the most since the euro’s debut in 1999. The dollar was at 94.57 yen from 94.51 yesterday, set for a 3.4 percent loss since March 13. The euro was at 129.18 yen from 129.17 yesterday, after gaining 2 percent this week. The Australian dollar rose to 68.74 U.S. cents from 68.51 cents yesterday, and headed for a 4.5 percent weekly advance. The New Zealand dollar climbed to 55.74 U.S. cents from 55.35 cents, and was set for a 6.2 percent gain this week. Trading in currencies may be more subdued than usual because of a national holiday in Japan today, Callow said. Commodity Producers Currencies of commodity producers such as New Zealand are leading the rally against the greenback, which slid against all of the 16 most-traded currencies over the past five days. Silver jumped 13 percent yesterday, the most since 1979, gold had the biggest increase since September and crude oil topped $52 a barrel as the Fed’s steps to revive the U.S. economy prompted speculation demand for raw materials will increase as investors seek hedges against inflation. “You saw a rally in the euro as well as commodity currencies,” said Thomas Harr, a senior currency strategist at Standard Chartered Bank in Singapore. “It’s related to the rebound in commodity prices over the last couple of weeks.” Dollar Index The trade-weighted Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, headed for its biggest weekly decline since 1985, as the Fed said March 18 it would buy Treasuries and an additional $750 billion of agency mortgage- backed securities. “As the money-printing machine kicks into high gear, dollar devaluation should accelerate with a ballooning money supply,” Yilin Nie, New York-based currency strategist at Morgan Stanley, wrote in a research note yesterday. The Fed’s move “is a key negative for the dollar.” The Dollar Index traded at 83.179 today from 83.129 yesterday, when it touched 82.631, the lowest since Jan. 9. It is poised for a 4.9 percent loss this week. Morgan Stanley recommended investors buy the euro against the dollar at $1.3704, with a target of $1.45 and a stop-loss order at $1.30. A stop-loss order is an automatic instruction to sell or buy a currency should it reach a particular level. The dollar fell by the most in nine years versus the euro on March 18. Yields on benchmark 10-year Treasuries slid the same day by the most since 1962 after the Fed said it would concentrate purchases in notes due from two to 10 years. The yield on the 2.75 percent note maturing February 2019 was little changed at 2.60 percent, and has fallen 29 basis points this week, according to data compiled by Bloomberg. Fed Chairman Ben S. Bernanke will speak on “The Financial Crisis and Community Banking” at 9 a.m. in Phoenix, Arizona today. ‘Dollar Devaluation’ Losses in the dollar may be limited because of the currency’s “over-reaction” to the Fed’s decision to buy Treasuries, according to Commonwealth Bank of Australia. While the dollar fell after the Fed’s announcement, the Bank of England is buying U.K. gilts, the Bank of Japan is purchasing Japanese government bonds and the European Central Bank is likely to announce their intention to buy government bonds on April 2, Richard Grace, Sydney-based chief currency strategist at Commonwealth Bank, wrote in a note to clients. “It will take a week for the dollar to recover three- fourths of its losses,” Grace wrote. “Currency direction is not about relative quantitative easing. Otherwise, the euro would be falling the most because the ECB is undertaking more quantitative easing as a percentage of gross domestic product.” Grace estimates the ECB has injected 2.1 trillion euros ($2.9 trillion) into the financial system, equal to 22.7 percent of the euro region’s gross domestic product, while the Fed’s $2.2 trillion is 15.5 percent of the U.S. economy.

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