The dollar fell against the euro after the Federal Reserve added to its monetary-stimulus program by announcing plans to buys more Treasuries, renewing concern the measures will debase the U.S. currency.
The U.S. currency weakened after the central bank tied its policies to economic benchmarks and said it will buy an additional $45 billion of Treasuries a month, adding to its third round of quantitative easing, and matching economists’ forecasts. The yen fell to the weakest in eight months versus the dollar as Japan’s Liberal Democratic Party, which has pledged fiscal stimulus to stoke economic growth, leads in polls before Dec. 16 elections.
“The market tends to have that kind of reaction when an action is perceived as more quantitative easing,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA, said in a telephone interview. “Even though we saw the dollar fall, any weakness in the dollar will generally be capped by safe-haven flows.”
The dollar declined 0.6 percent to $1.3076 per euro at 3:04 p.m. in New York, reaching the lowest since Dec. 5. The euro gained 1.3 percent to 108.72 yen. The Japanese currency lost 0.8 percent to 83.15 per dollar, reaching the lowest level since April 2.
“Dollar-yen is holding above 83, which is quite remarkable given that the Fed just eased policy,” Marc Chandler, New York- based global head of currency strategy at Brown Brothers Harriman & Co., said in a telephone interview. “If you would’ve told most people the Fed would announce aggressive QE, they would’ve expected the dollar to get sold off across the board.”
The central bank linked the outlook for its main interest rate to unemployment and inflation.
“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Fed Chairman Ben S. Bernanke said in a press conference in Washington today after a meeting of the Federal Open Market Committee. The Fed plans to “maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability,” he said.
The Fed said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent. The committee “views these thresholds as consistent with its earlier date-based guidance.”
A Fed program known as Operation Twist, which was designed to hold down borrowing costs by lengthening the average maturity of the Fed’s holdings, will expire at year-end. The central bank kept its target rate for overnight loans between banks between zero and 0.25 percent since December 2008 to spur economic growth.
The greenback gained 0.1 percent against the euro on Oct. 24 after Fed policy makers announced they would maintain mortgage security purchases of $40 billion a month. Two previous rounds of quantitative easing totaling $2.3 trillion failed to breathe life into the labor market.
U.S. leaders are grappling with a budget-deficit showdown that may push the world’s largest economy into recession. The nation faces a fiscal cliff of $607 billion in automatic spending cuts and tax boosts starting Jan. 1 if lawmakers can’t reach agreement. That would cause the economy to contract 0.5 percent next year, according to the Congressional Budget Office.
In Japan, LDP leader and former premier Shinzo Abe has called for a doubling of the central bank’s inflation goal to 2 percent and “unlimited” easing to end more than a decade of falling prices. The Bank of Japan is due to a hold a monetary policy meeting on Dec. 19-20.
The euro strengthened earlier today as Greece plans to repurchase government bonds with a face value of 31.9 billion euros ($41.6 billion) from private investors including its own banks in a debt buyback to free up aid for the cash-strapped country.
Greece will pay an average weighted price of 33.8 percent of face value for bonds maturing from 2023 to 2042, the Athens- based Public Debt Management Agency said in a statement on its website today.
The 17-nation currency rose as former Italian Prime Minister Silvio Berlusconi offered to drop his plans to run for premier on the condition that Italian Premier Mario Monti agrees to enter the election campaign and lead a coalition of “moderates.”
The euro was already rising on Berlusconi’s comments before the FOMC news, said Chandler of Brown Brothers Harriman.
The euro may strengthen against its U.S. counterpart to $1.3490, its highest level since Dec. 2, 2011, if it closes the week above a so-called retracement level of $1.30, according to Richard Adcock, head of fixed-income technical strategy at UBS AG in London.
The Swiss franc’s rebound from a three-month low against the euro shows that even bank charges for deposits and a lull in Europe’s debt crisis can’t deter demand for the currency.
The Zurich-based Swiss National Bank will keep its franc ceiling at 1.20 per euro tomorrow, according to all 14 analysts in a Bloomberg News survey. While the currency weakened after Credit Suisse Group AG said on Dec. 3 it would set negative rates for franc cash balances, it pared almost all those losses in a three-day run of gains.
China’s yuan weakened versus all but one of 24 emerging markets currencies on speculation the People’s Bank of China is limiting gains in the currency to aid exporters.
The currency depreciated 0.1 percent to 6.2515 per dollar after earlier falling to 6.2568, its lowest level since Oct. 23. This marked the fifth straight day of decline for the yuan, its longest losing streak since May.