Markets

Dollar rises as market trims Fed expectations

NEW YORK : The dollar rose against major currencies on Wednesday, erasing early losses, as investors bought the currency
Published August 24, 2011

dollarNEW YORK: The dollar rose against major currencies on Wednesday, erasing early losses, as investors bought the currency for fear the Federal Reserve may not signal any new plans to stimulate the economy at a meeting this week.

The currency's gains were not big and traders said there was little conviction behind them, as reflected by several back-and-forth moves inside fairly tight ranges.

But market participants were trimming some bets against the dollar in case Fed chief Ben Bernanke holds his fire in Friday's annual Jackson Hole speech.

While markets are worried that the US economy may slip into recession, they are not entirely convinced that the Fed is ready to announce another bond-buying program on Friday. The Fed already pledged earlier this month to hold benchmark interest rates near zero until at least 2013.

"The speech is a real wildcard for markets so people are being cautious, but I think some of the dollar buying is based on the idea that Bernanke won't be too aggressive just yet," said Kathy Lien, head of research at GFT Forex in New York.

Bernanke used last year's annual Jackson Hole speech to hint at another round of quantitative easing, which eventually pumped $600 billion into the financial system.

More money in the system depresses the value of the dollar and encourages investors to seek higher returns elsewhere.

The euro was last down 0.3 percent at $1.4399 while the dollar reversed early losses to trade up 0.2 percent at 76.80 yen. Gold prices also fell for a second straight day and US stocks surrendered early gains.

A surge in US orders for long-lasting durable goods also eased some fear about the US economy. Currencies from Canada and Mexico got the biggest boost, due to the countries' strong US trade links.

Greg Salvaggio, vice president of trading at Tempus Consulting, said "markets are bit confused about whether there will be a QE3 or not" and investors are taking profits. He said a $130 decline in gold over the last two days reflects that.

YEN INTERVENTION STILL A RISK

Despite its gains, the dollar remained near a record low just beneath 76 yen, and some analysts said that could at some point spark another round of intervention by Japan to weaken the currency.

A new Japanese program that urges firms to exchange yen for foreign assets had little impact on the currency, and a one-notch downgrade to its credit rating by Moody's also failed to send it much lower.

Citigroup currency strategist Todd Elmer said the new scheme "treats the symptoms, not the underlying cause (of yen strength), so it's not going to have any impact whatsoever in supporting dollar/yen."

Yen gains are a function of worries about global growth, particularly with markets concerned the US economy may be on the brink of recession.

But while the yen is a favorite shelter for investors who want to exit trades in higher-yielding but riskier assets, yen appreciation hurts Japan's economy by undercutting its exports.

Societe General strategist Sebastien Galy said Japan "is laying the ground for far more aggressive policy."

He said the dollar may grind lower in the near term and could break through its record low. "But when it does, the next shoe will drop," he said.

Bank of Japan data suggested Japan sold roughly 4.5 trillion yen in currency intervention on Aug. 4, its biggest-ever one-day action, but it has had limited effect.

 

Copyright Reuters, 2011

 

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