Sterling slides as Bank of England minutes signal rates on hold
By William L. Watts and Lisa Twaronite, MarketWatch
BOSTON (MarketWatch) — The dollar largely stuck to narrow ranges Wednesday, with an index measuring it against global rivals edging up ahead of the U.S. central bank’s policy decision and a news conference by Fed Chairman Ben Bernanke.
The Fed is widely expected to make the formal decision to end its easing program of buying $600 billion of Treasury securities on June 30 as scheduled. It is also expected to hold interest rates steady and maintain its policy to keep its balance sheet from shrinking. Read Fed preview.
The dollar index DXY -0.02% , which measures the performance of the U.S. unit against a basket of six other major currencies, slipped 0.15% to 74.54 in North American trade early Wednesday.
The rate announcement by the Fed’s policy-making Federal Open Market Committee meeting will be followed by Bernanke’s press conference.
The Fed appears content to maintain the size of its balance sheet, embarking on a very moderate form of monetary-policy normalization toward year’s end, provided economic conditions start to improve, according to Kathleen Brooks, research director at Forex.com.
“All of this means that the U.S. is likely to remain a low interest-rate environment for some time yet,” she wrote in a note. With an inverse correlation between the size of the Fed’s balance sheet and the dollar, the greenback will struggle to convincingly stage a rebound, Brooks added.
The euro EURUSD +0.05% was last trading at $1.4427, up 0.3%. See real-time currency quotes and tools.
The euro gained ground Tuesday ahead of a confidence vote on the reshuffled Greek government. The government survived the vote, prompting some profit-taking, strategists said. Read more on key battles ahead for Greece, euro zone.
Strategists said the vote, which is seen as potentially clearing the way for approval of additional austerity measures next week, should be a net positive for the shared currency.
“We see this as a positive for the euro, insofar as it removes one of the (major) potential uncertainties” ahead of the next round of funding from the European Union and International Monetary Fund in early July under the existing Greek bailout program, said RBC Capital Markets senior currency strategist Sue Trinh.
“However, the path is far from clear for Greece, and the next significant issue that will need negotiating is a vote in the Greek parliament next Tuesday to pass the latest proposed austerity measures,” she wrote to clients.
The British pound GBPUSD -0.69% changed hands at $1.6130, down from $1.6246. The euro rose 0.86% versus the sterling to change hands at 89.43 pence.
The pound came under pressure after minutes of the Bank of England’s policy meeting earlier this month confirmed a 7-2 vote in favor of leaving rates unchanged.
The minutes showed a majority of monetary-policy committee members were more concerned about a sluggish recovery and downside risks to inflation, despite expectations annual inflation will hit 5% at some point this year before turning down. The bank’s inflation target is 2%.
The minutes also showed that for “some members,” a further round of asset purchases under the Bank of England’s asset-purchase program could be warranted if downside inflation risks materialize.
“This has taken its toll on sterling this morning, with the market now no longer pricing in a rate hike until July 2012,” said James Knightley, U.K. economist at ING Bank. “Admittedly, our call for a November rate rise is looking a little aggressive right now, but we still feel the economy can bounce back relatively strongly” in the second half.
Against the Japanese yen, the dollar USDJPY -0.19% rose to ¥80.06, down 0.19%.
The Australian currency AUDUSD +0.25% rose to $1.0639 from $1.0601 Tuesday.
William L. Watts is a reporter for MarketWatch in London.
Lisa Twaronite is MarketWatch's Tokyo bureau chief.
