Euro underpinned as Irish bond auction finds solid demand
By William L. Watts and Myra P. Saefong, MarketWatch
LONDON (MarketWatch) — The dollar lost ground against most major rivals Tuesday as traders awaited the Federal Reserve’s policy announcement, while the euro found modest support as investors showed solid demand for Ireland’s auction of government bonds.
The dollar index (DXY 81.06, -0.28, -0.34%) , a measure of the greenback against a basket of six major currencies, stood at 81.010, down from 81.334 late Monday.
In Washington, the Federal Open Market Committee isn’t expected to take action on interest rates at the end of its one-day meeting assessing the state of the U.S. economy. Investor attention has centered around whether the Fed’s policy makers would bow toward another round of so-called quantitative easing -- dubbed “QE-2” in financial markets.
The FOMC’s decision and policy statement are due for release at 2:15 p.m. Eastern. Read more about the FOMC meeting.
Concerns that the U.S. central bank could signal it is moving toward a further round of quantitative easing are casting a cloud over the dollar, currency strategists said.
The dollar may get some support “if the FOMC holds off on QE-2 and leaves its rhetoric broadly unchanged, as the market is likely to modestly reduce its expectations of QE-2,” analysts at Barclays Capital said in a research note Tuesday.
However, the dollar’s “overall downward trend ... will likely remain intact for now,” they wrote, explaining that the foreign-exchange market “is not heavily positioned at the moment and is not likely to back too far away from its expectations for QE-2.”
In recent dealings, the euro (EURUSD 1.3130, +0.0063, +0.4823%) bought $1.3134, up from $1.3062 in late North American trading on Monday.
The euro traded near its intra-day high as Ireland’s National Treasury Management Association said it sold 1.5 billion euros ($2 billion) of 2014 and 2018 government debt, the maximum amount on offer.
The auction, which produced solid bid-to-cover ratios for both issues, helped ease worries in credit markets over euro-zone sovereign debt. The single currency saw some recent pressure as peripheral euro-zone bond yields rose, led by Ireland, and as credit default swap spreads widened over the fiscal implications of Ireland’s banking crisis. Read about the auction results.
The euro’s response to the Fed meeting, meanwhile, will likely depend on “nuances” in the FOMC statement, said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.
“We assume that the Fed will try and avoid painting too pessimistic a picture so as not to put pressure on consumer sentiment,” Leuchtmann said.
Meanwhile, the British pound (GBPUSD 1.5518, -0.0031, -0.1994%) fell 0.3% to trade at $1.5513.
The Office for National Statistics on Tuesday said that the public-sector borrowing requirement in August was 15.3 billion pounds ($23.8 billion), compared to £13.5 billion in August 2009. Economists had forecast a gap of £13 billion.
The figure was the highest on record for the month of August.
“Overall, this report should serve as a more-than-gentle reminder of the need to arrest the pace of increase in current expenditure and, due to increased interest-rate costs, the difficulties that will be encountered during this process,” said Stuart Green, economist at HSBC.
Against the Japanese yen, the dollar (USDYEN 85.4700, -0.2200, -0.2567%) bought ¥85.45, down from ¥85.80 Monday.
“The question for traders is at what level the Bank of Japan may step back into the market in meaningful size to counter further crawling strength of the yen,” wrote strategists at FxPro.
“There is some thinking that the line in the sand may be around the ¥85 area,” they said, adding in a research note that any retreat in the value of the dollar below this level “would increase the perception that the [mid-September] intervention was losing its impact.”
