Sterling slides as British economy suffers double-dip recession
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar declined on Wednesday as traders awaited a statement from the Federal Reserve’s rate-setting committee and a news conference hosted by Fed Chairman Ben Bernanke.
The British pound fell after data showed Britain’s economy unexpectedly slipped back into recession in the first quarter, but pared losses as attention turned to U.S. policy.
The dollar index DXY -0.07% , which compares the U.S. unit against a basket of major currencies, slipped to 79.169, from 79.256 in late North American trade Tuesday.
The move extended recent losses for the dollar, which lost ground Tuesday after a batch of weak economic data. See report on Tuesday currency action.
The euro EURUSD +0.0866% rose to $1.3204, from $1.3187 late Tuesday.
Analysts will be looking for any indication whether policy makers have become more or less inclined to expand the Fed’s bond-buying program often called quantitative easing. QE tends to devalue a country’s currency.
“With the Fed being unlikely to throw out any reference to more QE, expect Bernanke to avoid explicit hints at this stage, that should ease any residual dollar nervousness into the decision and press conference,” said Jeremy Stretch, currency strategist at CIBC in London.
“We would look to buy into dollar dips, looking to fade euro gains up to resistance up at $1.3240, [a move] above $1.3260 suggests we are wrong,” he said, in a note to clients. Dips by the dollar index to the 78.95 level also remain attractive, Stretch said.
But Kathy Lien, research director at GFT, said the Fed events could give the euro a chance to break higher after being stuck in a range of $1.30 to $1.3227 over the past 2½ weeks.
“If the Federal Reserve is less dovish than the market expects, the [euro] could slip back toward the bottom of its recent range. If they are more dovish, the [euro] could break above recent highs,” Lien said.
Lien also said that Wednesday’s Fed events could likely “create more confusion than clarity,” leading to volatile trading in currency markets.
“We only need to remember back to March when the disconnect between the more optimistic [Federal Open Market Committee] statement and more pessimistic comments from Bernanke days later created widespread volatility for the U.S dollar,” she said.
The British pound GBPUSD +0.0046% dropped, then pared its loss against the dollar, after data showed the U.K. fell back into a recession. Read about Britain’s double-dip recession.
Against the Japanese yen the dollar USDJPY +0.0159% traded at 81.37 yen, from ÂĄ81.28 late Tuesday.
The yen tends to be sensitive to U.S. Treasury yields — with higher yields making it more attractive for Japanese investors to shift into dollars. Treasury yields rose slightly ahead of the Fed events. Read about Treasury yields.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Michael Kitchen in Los Angeles contributed to this report.
