The dollar rose against the euro and yen on Wednesday, buoyed by the appeal of higher short-term rates, after the US Federal Reserve, as widely expected, said it would shift its portfolio in favour of long-term debt. The Fed unveiled a program, dubbed "Operation Twist" by market participants, to put more downward pressure on long-term interest rates over time and help the battered housing sector.
The Fed said it would launch a new $400 billion program that will tilt its $2.85 trillion balance sheet more heavily toward longer-term securities by selling shorter-term notes and using those funds to buy longer-dated Treasuries. An important dollar-positive by-product of the Fed's program is higher short-term rates. Also supporting the dollar is that the Fed chose to not increase the money supply.
"But it seems this is one of the last things they (the Fed) can do, so I think we might see some dollar profit-taking at some point," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "Europe's still a mess and the global economy right now seems to be stagnating. And this seems to be the Fed's final shot." In late afternoon New York trade, the euro dropped 0.6 percent to $1.3618. The dollar also hit session highs against the Australian dollar and sterling after the Fed's statement.
The euro erased gains garnered in the afternoon on news of Greece's outline of key measures to help alleviate the country's fiscal problems. 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 1.2 percent to 0.8976 francs and the euro climbed 0.6 percent to 1.2224 francs.
A strong currency hurts exports in Japan and Switzerland and slows overall economic growth. The dollar rose 0.3 percent to 76.64 yen, but not far from a record low of 75.94 reached last month. Sterling was down 1.4 percent at 1.5524 dollars and was already under pressure before the Fed statement after minutes released by the Bank of England showed it was ready to pump more money into the UK economy.