Dollar declines as Fed says it will maintain bond-buying pace

The dollar declined (NYBOT:DXZ13) to almost a three-month low as the Federal Reserve announced it will refrain from reducing its $85 billion in monthly bond purchases and keep pumping money into the U.S. economy in an attempt to boost growth.

“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. Most Federal Reserve policy makers expect the first increase in the nation’s benchmark lending rate to occur in 2015.A survey of economists conducted by Bloomberg forecast a $5 billion reduction of Treasury purchases.

“A failure to taper will be pretty damaging to the dollar,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said yesterday in a telephone interview. It’s a “big surprise and a negative development for the dollar,” he said.

The Bloomberg U.S. Dollar Index decreased 0.7% to 1,012.90, lowest since June 19. The greenback slipped 0.7% to $1.3448 per euro and fell 0.8% to 98.34 yen.

Fed Chairman Ben S. Bernanke previously said he expected the central bank to complete its asset-purchase program in the middle of next year when the unemployment rate is around 7%, down from August’s 7.3%. Bernanke and the Federal Open Market Committee have said they won’t consider raising its federal funds rate target as long as unemployment is 6.5% or higher.

Fed Policy

The Fed has kept interest rates at almost zero since December 2008 and undertaken three rounds of bond buying that have swelled its balance sheet to a record of $3.66 trillion. The Fed was previously buying $40 billion a month in mortgage debt and $45 billion of Treasuries.

Ending the Fed’s third round of quantitative easing carries greater significance than completion of the previous two because QE3 involves open-ended purchases, both in amount and duration, whereas its predecessors were introduced with defined purchase levels over a fixed period of time.

Bernanke initially signaled on May 22 that the central bank my reduce its monthly bond purchases, sending the Bloomberg U.S. Dollar Index to the highest level of the year.

Builders began work on fewer U.S. homes than projected in August and applications for future work declined more than forecast, underscoring the risk that higher mortgage rates pose for the real-estate rebound.

Housing starts rose 0.9% to a 891,000 annual rate, following the prior month’s 883,000 pace that was weaker than previously estimated, a Commerce Department report showed today in Washington. The median estimate of 83 economists surveyed by Bloomberg called for 917,000. Permits dropped 3.8% to a 918,000 pace, showing a lack of drive heading into this month.

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