Euro recovers from biggest 2-day drop since January 2009
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The dollar pared its decline against the euro and other major currencies on Wednesday after the Federal Reserve came off as less worried and less inclined to ease monetary policy further, relieving the fears of some dollar bears.
Still to come is a press conference with Fed Chairman Ben Bernanke, while investors were also keeping an eye on developments in Greece after an unexpected call for a bailout referendum crushed risk appetite the previous day.
The dollar index DXY -0.20% , which measures the performance of the greenback against a basket of six currencies, traded at 77.202, up from 76.913 before the Fed report but still down compared to 77.298 in late North American trading on Tuesday.
The euro EURUSD +0.17% pared gains $1.3722, from $1.3712 Tuesday.
The British pound GBPUSD -0.09% turned down to $1.545, from $1.5963.
Against the Japanese yen, the dollar USDJPY -0.34% bought 78.11 yen, down from ¥78.34 Tuesday.
The Fed’s Open Market Committee continued to note significant downside risks to its economic outlook and maintained its program to extend the maturity of its debt portfolio, known as “Operation Twist.”
The statement gave no hints that officials are even contemplating a third round of quantitative easing, a program that tends to devalue a country’s currency. Read about FOMC decision.
The statement “may deter the most bullish thinking that another round of QE will be enacted before year-end,” said Alan Ruskin, global head of G-10 FX strategy at Deutsche Bank. “This probably explains the very mild slippage in Treasurys, and marginal U.S. dollar gains.”
“The initial read is that those who feared that another round of monetary unorthodoxy would limit the dollar’s ability to benefit from the euro’s travails are mistaken, at least for this year,” he said. Read about Fed’s options, bond market.
The central bank will release its updated economic forecasts just before Fed Chairman Ben Bernanke will host a news conference at 2:15 p.m. Eastern time.
“No policy changes are expected, but investors will be listening for any shift on his stance on QE3,” or a third round of quantitative easing, said Chris Walker, strategist at UBS.
Some analysts had warned that recent market turmoil increases the risk that the Fed makes a move. Read more on Fed’s Bernanke.
Quiet on the Greek front
The day's moves reverse some of the euro’s losses in the last two sessions — the biggest two-day percentage drop since January 2009. On Tuesday, markets were spooked by Greek Prime Minister George Papandreou’s announcement that the country would hold a confidence vote as well as a referendum on Europe’s latest rescue plan. Papandreou is meeting European leaders, who appeared blind-sided by the move, in Cannes, France — a day ahead of the Group of 20 summit.
“Headline risk remains acute as German Chancellor [Angela] Merkel and French President [Nicolas] Sarkozy speak with the Greek government, the International Monetary Fund and their European partners ahead of a Group of 20 summit,” said Sue Trinh, strategist at RBC Capital Markets.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is a reporter for MarketWatch in Frankfurt. Sarah Turner in Sydney contributed to this report.
