BLBG:Dollar Slides Before Fed Meeting On Easing Speculation
The dollar slid against the euro and yen before the Federal Reserve begins a meeting today amid prospects policy makers will consider further monetary easing steps to sustain the U.S. economy.
The Japanese currency gained versus most of its 16 major counterparts as Group of 20 leaders meet in Mexico for a second day to discuss Europe’s debt crisis that has spurred investor demand for refuge assets. Spain’s borrowing costs soared to a euro-era record yesterday before the nation sells bills today. Australia’s dollar halted a three-day advance after the Reserve Bank said it lowered interest rates this month after a “finely balanced” discussion.
“There are some expectations that the Fed may extend the Twist program,” Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore, said about the central bank’s plan to lengthen the maturity of its Treasury holdings. “The Fed may also give some indication that they may do something in the later part of the year. The dollar will come under pressure.”
The dollar declined 0.2 percent to $1.2606 per euro at 6:30 a.m. in London from yesterday, when it touched $1.2748, the lowest level since May 22. The greenback dropped 0.2 percent to 78.99 yen. Japan’s currency fetched 99.58 per euro from 99.49.
Fed policy makers will bring new forecasts to their two-day meeting starting today and probably will mark down their April central tendency estimate for growth of 2.4 percent to 2.9 percent this year. They will also contend with continuing financial stress in Europe and a U.S. unemployment rate that has remained above 8 percent for 40 consecutive months.
’Risk Management’
All this could prompt them to move away from their outlook for moderate growth and tilt toward a “risk-management” strategy pioneered by former Fed Chairman Alan Greenspan, which puts more emphasis on tracking and containing high-cost threats. Both Janet Yellen, the Fed’s vice chairman, and William C. Dudley, head of the Fed Bank of New York, used the phrase in the past month.
That insurance may come in the form of extending so-called Operation Twist -- which JPMorgan Chase & Co. and Jefferies & Co. predict -- or an even more aggressive response if Fed officials see high costs in a slowdown of U.S. growth. The $400 billion program, which was announced in September and ends this month, involves selling short-term debt and buying longer-term bonds.
“A mere extension of Operation Twist may disappoint markets that have been expecting something more aggressive,” said Yuki Sakasai, a currency strategist at Barclays Capital in New York. “That may lead to some selling of risk currencies, and buying back of the dollar.”
Quantitative Easing
The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, or QE, from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy. The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, tumbled 14 percent during that period. The gauge fell 0.2 percent to 81.795 today, after yesterday touching 81.161, the lowest level since May 22.
G-20 leaders are in Los Cabos, Mexico for a second consecutive summit to be dominated by Europe’s debt woes. With Greek elections over the weekend failing to damp the threat of contagion, policy makers are discussing ways to stimulate the world economy if necessary, a Canadian official said.
The International Monetary Fund has commitments for $456 billion to be used as a “second line of defense” to resolve and prevent financial crises, according to Managing Director Christine Lagarde, which she said almost doubles the fund’s lending capacity. Lagarde made the announcement in an e-mailed statement during the G-20 summit.
Spanish Yield
Spain on June 9 asked for a bailout of as much as 100 billion euros ($126 billion) to prop up its banks, becoming the fourth member of the euro bloc to request international aid.
Spanish 10-year yields yesterday jumped as much as 41 basis points to 7.29 percent, the most since the euro was introduced in 1999 and above the 7 percent level that pushed Greece, Ireland and Portugal to seek rescue packages. Spain is set to auction 12- and 18-month bills today, followed by an offering of bonds on June 21.
A Greek election on June 17 that saw victories for pro- bailout parties “was only enough to produce a brief rally in risk assets,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp. (WBC), Australia’s second-largest lender. “We don’t have a proper firewall to the euro crisis. We’ll probably see Spanish yields continuing to rise. The euro will come under pressure on all fronts.”
RBA Minutes
The Australian dollar snapped a gain against the yen after the Reserve Bank of Australia released minutes of its June 5 meeting at which policy makers cut the overnight cash-rate target to 3.5 percent, the lowest since 2009.
“There was clear evidence suggesting a softening in global conditions, and uncertainty about the future in Europe had increased significantly,” minutes released today in Sydney showed.
The so-called Aussie bought $1.0125 from $1.0124 yesterday, when it capped a three-day gain of 1.9 percent. It fell 0.1 percent to 79.98 yen, after climbing 0.9 percent yesterday.
To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
