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Dollar recovers after Fed, euro slips

dollar-euro 400LONDON: The dollar rose on Thursday as investors looked past a fresh Federal Reserve stimulus programme, which was in line with expectations, and drove some to book profits on short dollar positions.


The dollar extended gains against the yen, and was seen likely to gain further on expectations the Bank of Japan will ease monetary policy further. An election on Sunday could see a new leader elected who is likely to apply more pressure on the BOJ to ease policy aggressively.


The dollar index was up 0.12 percent at 79.91, recovering from a one-week low of 79.711 hit after the Fed's decision on Wednesday. Against the yen, the dollar was at 83.40 yen, not far from the 2012 high of 84.187 yen hit in March.


"The moves now are basically people unwinding positions, to be honest. Any such moves are now exaggerated by thin volumes as we move into year-end," said Neil Mellor, currency strategist at Bank of New York.


The euro was flat on the day at $1.3070, pulling away from session highs of $1.31005, with stop loss sell orders cited under $1.3045.


"The Fed announcement has had a fairly limited impact on most of the majors," said Adam Cole, global head of FX strategy at RBC Capital Markets. "The move now in the euro is more about market positioning and political developments, where the signs seem slightly more encouraging in Italy at the moment."


The euro found some support after former Italian prime minister Silvio Berlusconi, who had abruptly withdrawn support for Prime Minister Mario Monti's government last week, offered to stand back and suggest Monti could become the candidate of a centre right coalition at an election expected in February.


The Fed said it would keep buying $45 billion of government bonds each month after its "Operation Twist" programme expires this month, in addition to buying $40 billion a month in agency mortgage-backed securities.


only surprise lay in the Fed's decision to explicitly link its policy path to unemployment and inflation, but that had little immediate impact as the Fed's economic projections suggested no change in its pledge to keep rates near zero until mid-2015.


A rise in stocks appeared to be running out of steam with US stock futures pointing to a sluggish start on Wall Street.


"I can't remember shares falling on the day of announcement of previous QE. US bonds also fell even though what the Fed will do is to improve the market's supply-demand dynamics," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.


"The market's reaction raises concerns that the market may be becoming more worried about the policy's side effect, which includes deterioration in the Fed's balance sheet," he added.

Copyright Reuters, 2012