Dollar drops before Fed, Swiss franc sharply lower

NEW YORK: The dollar rose against most currencies on Wednesday as Europe's ongoing debt crisis hurt the euro and markets awaited the end of a Federal Reserve meeting to see what officials would do to boost US growth.

Among major currencies, only the yen bucked the trend, nearing a record high against the dollar as worries about the world economy boosted its safe haven appeal. Its rise raised fear Japan might try to weaken the yen through intervention.

The dollar fell as low as 76.11 yen, near a 75.94 record low, and was last unchanged on the day at 76.39 yen.

The Fed was expected to announce plans later to tilt its $2.8 trillion portfolio toward longer-dated government debt, an attempt to stoke lending with lower long-term borrowing costs.

Dubbed "Operation Twist," the move would likely see the Fed sell shorter-dated securities, driving up short-term rates and possibly giving the dollar a boost. It's also seen as a plus for the dollar because it would not increase the money supply.

But if the Fed succeeds in pushing long-term rates lower, Japanese investors could opt to sell Treasuries and repatriate the proceeds, adding to upward pressure on the yen.

The US benchmark 10-year yield was near a multi-decade low at 1.94 percent Wednesday, compared with 1.01 percent on 10-year Japanese government bonds.

Currency traders said the overall impact would be fairly modest, though, on both exchange rates and the US economy.

"Rates are already at historic lows, that's not the reason the US economy isn't performing. The market might get the impression all these measures do not make much sense," said Lutz Karpowitz, FX strategist at Commerzbank.

The euro was down 0.3 percent at $1.3665 while sterling hit an eight-month low beneath $1.56 after dovish Bank of England minutes.

FED LIMITS, EUROPE'S WOES

Firas Askari, head of currency trading at BMO Capital Markets, said the Fed is "reaching far down into an almost empty toolbox" and said dollar gains had more to do with continued concern about Europe's debt crisis.

European shares slid on Wednesday and Barclays Capital slashed its euro forecast, putting the currency at $1.33 in a month's time and $1.25 in three months' time. It cited mounting concerns Greece will default and increasing pressure on Italy and Spain.

The euro and the dollar both rose against the Swiss franc though as talk swirled that the Swiss National Bank may lift its euro/Swiss target to 1.25 from 1.20. The SNB has declined to comment on the rumors.

The euro climbed 0.4 percent to 1.2206 francs while the dollar added 0.7 percent to 0.8931 francs.

Askari said Swiss attempts to weaken the currency will increase pressure on Japanese authorities to intervene should the dollar fall into the 75-75.50 yen range.

"They'll have to pull the trigger," he said. "Japan has tepid growth at best."

A strong currency hurts exports in Japan and Switzerland and slows overall economic growth.

In the options market, one-month dollar/yen implied volatility inched higher to 11 percent and risk reversals moved out in favor of yen buying.

Copyright Reuters, 2011