NEW YORK: Dollar dropped against most currencies on Friday, hitting a more than four-month low versus the euro a day after the Federal Reserve announced a fresh round of monetary stimulus to boost a still lackluster US economy.
The Fed on Wednesday said it would embark on another phase of quantitative easing, by buying $40 billion of mortgage-backed debt per month until the outlook for US jobs improved substantially. It also expects benchmark US interest rates to stay near zero until at least mid-2015.
In the Fed's previous two rounds of QE, it bought about $2.3 trillion in bonds to lower long-term rates. While lower rates may prompt more US business and residential investments, they are viewed as negative for the dollar as there is less incentive for foreigners to buy what could be lower-yielding US debt.
Some market players said the Fed's announcement and the European Central Bank's plan agreed last week to lower peripheral euro zone economies' borrowing costs could see the euro extend its rally toward $1.35 in the near term.
"The Fed's decision and the ECB's action together are decisive and consequential and should underwrite risk appetite well into next year." said Richard Franulovich, senior currency strategist at Westpac Securities in New York.
Commodity currencies including the Australian and Canadian dollars also rallied against the greenback, pushing the dollar index to 78.601, its lowest in more than four months. The index was last at 78.702, down 0.7 percent.
The dollar, however, gained against the yen, which fell broadly on speculation Japanese authorities could intervene to cap its recent gains against the dollar.
Expectations that the Bank of Japan could ease policy next week in response to the Fed's action will also likely undermine the yen, traders said.
The dollar rose more than 1.0 percent against the yen to 78.30 yen. It had hit a seven-month low of 77.11 yen on Thursday.
The euro hit a peak of $1.3168, its strongest level since early May. It was last at $1.3148, up 1.2 percent, as a drop in bond yields in smaller euro zone economies prompted investors to buy the currency. The euro zone single currency rose 2.6 percent this week, its best weekly performance since late January.
The euro has gained 4.5 percent against the dollar so far in September, helped by the ECB's bond-buying scheme and the German Constitutional Court backing the euro zone's bailout fund. It is up more than 8 percent from late July's two-year low of $1.2042.
Europe's common currency also rose to an eight-month high against the Swiss franc at 1.2179 francs and hit a four-month high against the yen of 103.00 yen. On the week, the euro gained 2.6 percent versus the yen, its highest weekly gain since June.
The dollar fell to 0.9235 Swiss franc its lowest since mid-May. The Australian dollar hit a one-month high of US$1.0624 as riskier assets rallied.
Risk-taking was also helped by better-than-expected US retail sales last month, which rose 0.9 percent, the largest gain since February. A jump in the Thomson Reuters/University Michigan consumer sentiment index this month also boosted risk appetite.
YEN LOSSES
The pledge of stimulus by the Fed should weaken the dollar and reduce other countries' export competitiveness, making markets wary that authorities might seek to counter this.
The Bank of Japan meets next week to decide on monetary policy and the Ministry of Finance has increased its threats to intervene in the currency market in the past few days.
"Of all the central banks that feel they will be drawn into a currency war by the Fed's action, the BoJ/MoF may feel the pressure most acutely," Jane Foley, senior currency strategist at Rabobank said in a note.
Traders in Asia said the BOJ, which conducts currency intervention on behalf of the finance ministry, checked rates on Thursday after the Fed's decision. Such checks are seen as a sign authorities may be edging closer to intervening.
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