Bank of England seen edging nearer additional quantitative easing
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The dollar edged higher versus most major currencies in range-bound trade Wednesday, as investors prepared for the conclusion of a U.S. Federal Reserve policy meeting that’s expected to see the central bank swap shorter-dated government securities for longer-dated ones in an effort to jump-start a moribund U.S. economy.
The dollar index DXY +0.31% , which measures the U.S. unit against a basket of six currencies, rose to 77.203 from 77.089 in North American trade late Tuesday.
Previous rounds of quantitative easing have been negative for the dollar.
“That’s partly because the message — ‘we’re debasing our currency by printing more of it’ —is bad for the dollar” and good for other safe-haven assets, said Kit Juckes, head of foreign exchange at Societe Generale. “But it’s mostly because the announcement has sent yields lower,” making it less rewarding to hold dollar-denominated assets.
A so-called twist operation by the Fed may send yields at the long end a little lower, but the front end of the yield curve, which has been a much bigger driver of forex trends, won’t get much help, he said. Read The Fed: Getting ready for a 'twist' by the Federal Reserve.
“I’m not a Treasury trader, or even a rates strategist, but I think the risk-reward finally favors shorting the front end” of the U.S. Treasury curve, he said, in emailed comments. “By extension, the FX conclusion is that perhaps down here at 76.30 Japanese yen (versus the U.S. dollar), a long dollar/yen position finally makes sense. We’ll find out this evening.”
The Fed is expected to announce the outcome of the Federal Open Market Committee meeting at 2:15 p.m. Eastern.
But the outcome of the FOMC meeting may still find itself overshadowed by the ongoing euro-zone debt crisis, said Steve Barrow, currency and fixed-income strategist at Standard Bank.
The euro EURUSD -0.42% changed hands at $1.3650 versus the dollar, down from $1.3705 late Tuesday.
Greek Prime Minister George Papandreou convened a cabinet meeting Wednesday after two days of conference calls between Finance Minister Evangelos Venizelos and members of the review team from the European Union and International Monetary Fund.
Papandreou is expected to press for speeding up austerity measures in an effort to secure an upcoming round of aid from the EU and IMF seen as necessary to avert default as early as next month.
The U.K.
The British pound GBPUSD -0.67% slipped to $1.5646 from $1.5727.
Minutes of this month’s meeting of the Bank of England’s nine-member Monetary Policy Committee showed no members joined Adam Posen’s call to boost the central bank’s bond-buying program, but indicated that further easing could be in store in October, economists said.
The MPC voted 8-1 to hold the size of BOE bond purchases, the centerpiece of its quantitative-easing program, at 200 billion pounds ($314.5 billion), but also showed a growing number of members may soon be tempted to join Posen.
“For most members, the decision of whether to embark on further monetary easing at this meeting was finely balanced since the weaknesses and stresses of the past month had significantly strengthened the case for an immediate resumption of asset purchases,” the minutes said.
For some members, a continuation of the conditions seen over the previous month “would probably be sufficient to justify an expansion of the asset-purchase program at a subsequent meeting,” they said.
“This is clearly a major swing in a dovish direction,” said James Knightley, economist at ING Bank, noting that it follows the central bank’s recent assessment that the £200 billion of asset purchases was equivalent to rate cuts of around 1.5 to 3 percentage points.
If the Bank of England cuts its growth and inflation forecasts in November, then a Nov. 10 increase in asset purchases looks likely, he said. Sterling would likely remain under pressure, Knightley said, with the Federal Reserve likely to lag behind in offering further quantitative easing of its own.
The euro changed hands at 1.2221 Swiss francs EURCHF +0.38% , up from 1.2157 francs Tuesday. The euro jumped versus the Swissie earlier in Tuesday’s session on unconfirmed rumors the Swiss National Bank was preparing to raise the floor on the euro/Swiss franc currency pair to 1.25 francs from 1.20.
The dollar fell to ¥76.32 versus Japan’s currency USDJPY -0.19% , down from ¥76.41 on Tuesday.
The Australian dollar AUDUSD -0.53% slipped to $1.0239 against the U.S. unit, down slightly from $1.0253.
William L. Watts is a reporter for MarketWatch in Frankfurt.
