BLBG: Dollar Rises As Fed Extends Monetary Stimulus, Citing Economy
The dollar erased losses against the euro after the Federal Reserve said it will extend its monetary stimulus to bolster the economy.
The Federal Open Market Committee said in a statement that it will extend its program to exchange shorter-term holdings for longer-term debt, dubbed Operation Twist, which was set expire this month. The Fed will release updated economic forecasts at 2 p.m., followed 15 minutes later by a press conference by Chairman Ben S. Bernanke. Demand for the 17-nation euro was bolstered earlier as leaders at a Group of 20 meeting pledged to take “all necessary policy measures” to defend the currency union.
“We’ve had quite a bit of build-up of expectations for some form of easing, given recent data and given comments from Fed officials,” Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, said in a telephone interview before the Fed statement.
The dollar rose 0.2 percent to $1.2662 per euro at 12:36 p.m. in New York. The U.S. currency rose 0.7 percent to 79.48 yen.
Benchmark Treasury 10-year note yields dropped to a record low 1.44 percent on June 1.
Fed Moves
The Fed will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of the year.
The continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today in a statement at the conclusion of a two-day meeting in Washington.
The Fed bought $2.3 trillion of assets in two rounds of stimulus known as quantitative easing between December 2008 and June 2011. The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, lost 14 percent during that period.
The central bank has also kept its benchmark interest rate at zero to 0.25 percent since December 2008.
Fed policy makers refrained at their April meeting from addition actions to stimulate the economy, keeping Operation Twist intact. The Fed committee said it expected economic growth to “remain moderate” over coming quarter before picking up gradually. The Dollar Index fell 0.3 percent that day.
Employers added the fewest jobs in a year in May, according to a report published earlier this month, increasing concern the labor market is slowing down. Fed Vice Chairman Janet Yellen said the declining job market and deteriorating financial-market conditions show the U.S. economy “remains vulnerable to setbacks.”
Economic Data
Other areas of the U.S. economy have shown signs of sluggish growth. Retail sales fell for a second straight month on investor concern that a decelerating U.S. recovery and the worsening debt crisis in Europe may weight on company balance sheets.
Government data showed earlier this week that builders in the U.S. broke ground on fewer homes than forecast in May as a slump in the construction of apartments swamped a pickup in single-family houses.
Antonis Samaras, leader of Greece’s New Democracy party, was sworn in as prime minister after Greek political leaders agreed on a coalition that will seek relief from austerity measures tied to international loans.
The 17-nation currency rose against the dollar for a second day following the Greek election result and the country’s steps toward instating a new government. The euro’s 14-day relative strength index against the greenback surpassed the 50 level.
Technical Levels
A breakthrough at this level suggested “widespread bullishness,” Eric Theoret, a currency strategist in Toronto at Bank of Nova Scotia’s Scotia Capital unit, wrote in a note to clients.
In its final statement, the G-20 backed Europe’s plans to consider a more integrated banking industry with common deposit insurance, a step that German Chancellor Angela Merkel has resisted. With attention shifting to a summit of European Union leaders in Brussels on June 28-29, the G-20 supported EU plans for closer economic union “that lead to sustainable borrowing costs.”
The shared currency will finish the year at $1.25, according to the median estimate in a Bloomberg News Survey. The yen will weaken to 82 versus the greenback and the Dollar Index will rise to 82.5, separate surveys show.
To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
