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Dollar resilient after Fed largesse, euro dips

June 21, 2012


Merkel's comments were taken by traders as leaving the door open for such bond purchases, said a trader for a major Japanese bank in Singapore. - File photo


SINGAPORE/SYDNEY: The dollar held above a one-month low against a basket of major currencies on Thursday, no worse for wear even after the Federal Reserve delivered another dash of monetary stimulus and said it was ready to do more if necessary.

What prevented dollar bears from rampaging was the fact the Fed stopped short of launching a more aggressive programme of buying bonds outright, or QE3, which some in the market had expected, traders said.

The central bank expanded its “Operation Twist” by $267 billion, meaning it will sell that amount of short-term securities to buy longer-term ones to keep long-term borrowing costs down. The program, which was due to expire this month, will now run through the end of the year.

Analysts said the outlook for the dollar remained clouded with more market players likely to position for fresh stimulus from the Fed following the central bank's move to downgrade its US growth forecast.

“We expect more monetary easing down the road,” Rabobank's senior US strategist Philip Marey wrote in a client note.

“The unemployment rate is still far above its target and expected to remain above target at least until 2014. What's more, the recovery remains fragile and uneven.”

The dollar index stood at 81.588, staying above a one-month low of 81.186 hit earlier in the week.

The euro dipped 0.3 per cent to $1.2672, having risen to a high of $1.2744 the previous day, near a one-month peak of $1.2748 set on Monday.

A focal point for the euro is the possibility of further policy steps to contain the euro zone's debt crisis.

The single currency got a lift on Wednesday after German Chancellor Angela Merkel said that both of Europe's bailout programmes included mechanisms for buying state debt on the secondary bond market.

Merkel stressed that this was a “purely theoretical” question and was not being discussed.

Her comments, however, were taken by traders as leaving the door open for such bond purchases, said a trader for a major Japanese bank in Singapore.

“Merkel's remarks seem to be leaning toward doing whatever it takes, so I was expecting to see a further unwinding of risk-off positions today,” the trader said, adding that the market's moves so far on Thursday had caught him off guard.

Against the yen, the euro slipped 0.3 per cent to 100.83 yen, backing away from a one-month high of 101.42 yen hit on Wednesday.

Euro-selling by Japanese exporters helped drag the single currency lower against the yen, said a trader for a European bank in Tokyo.

The dollar held steady against the yen at 79.57 yen, getting some support after US Treasury yields edged up the previous day.


The prospects of more stimulus, eventually, from the Fed helped underpin the euro and commodity currencies.

The Australian dollar dipped 0.2 per cent to $1.0163, but was not far off a seven-week high of $1.0225 set overnight.

The Aussie dollar hit an intraday low after a private-sector survey showed that China's factory sector contracted for an eighth straight month in June, with export orders at their weakest since early 2009.

Still, the Aussie dollar's reaction to the signal of weakness in China was relatively subdued.

“I think the indications from China at least, are that they are taking the slowdown a bit more seriously. So I don't think the number is going to be a huge driver,” said Todd Elmer, currency strategist at Citi in Singapore.

If the weakening in Chinese data is sustained, however, market players may start to question the effectiveness of Chinese policy steps to support its economy, Elmer said.

“That could present a much more serious threat to Aussie strength,” he added.

China is Australia's top export market and developments there tend to affect the Australian dollar.

Earlier on Thursday, the New Zealand dollar jumped above $0.8000 for the first time since early May after data showed New Zealand's economy grew 1.1 per cent in the January-March quarter, more than double what economists had expected.