Dollar drops ahead of Fed; euro jumps on Greece outline

NEW YORK: The dollar declined against the euro and yen on Wednesday as markets eyed the end of a Federal Reserve monetary policy meeting to see what officials would do to boost US growth.

The euro leaped on news of Greece's outline of key measures to help alleviate the country's fiscal problems. The euro hit a session high of $1.37770 on trading platform EBS and last traded at $1.3762, up 0.4 percent on the day.

Greece will wrap up the review of its bailout deal that it needs to receive a new aid tranche once inspectors from the European Union and International Monetary Fund return to Athens for talks next week. For story,

The Swiss franc slumped in position-squaring ahead of the Fed's policy announcement, due at about 2:15 p.m. (1815 GMT).

Markets expect the US central bank 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 short-dated securities, which could nudge up short-term rates and boost the dollar a bit. It would not increase the money supply, which traders say should support the dollar. For more, see

Some studies suggest that a $500 billion shift in the Fed's balance sheet is likely to push 10-year yields down by between 11 and 29 basis points and help flatten the curve, according to Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.

"However, much of this has already been priced into markets, accordingly the risk of disappointment is significant," Sutton said. "The announcement of operation twist would likely prove a minor dollar negative, but as long as US monetary policy continues to loosen, the dollar is unlikely to sustain a significant rally on anything other than risk aversion."

Firas Askari, head of currency trading at BMO Capital Markets, said the Fed is "reaching far down into an almost empty toolbox" and said markets remain worried about Europe's debt crisis.

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

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

The dollar rose 0.6 percent to 0.8918 francs and the euro climbed 0.9 percent to 1.2268 francs.

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

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

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. That could boost repatriation flows ahead of Japan's fiscal half-year end when investors typically sell foreign fixed-income assets.

Worries about the world economy and the approaching end of Japan's fiscal half-year boosted demand for the yen.

The dollar fell to 76.11 yen, near a 75.94 record low reached last month, but clawed back to 76.32 yen during early afternoon New York trade, down 0.1 percent.

Sterling hit an eight-month low beneath $1.56 after minutes released by the Bank of England showed it was ready to pump more money into the UK economy.

Copyright Reuters, 2011