FOREX-Dollar up vs euro, yen after Fed gets ready to 'Twist'

Wed Sep 21, 2011 4:12pm EDT

Related Topics

*Fed unveils Operation Twist, dollar impact mild to positive *Greece outlines key measures for more aid *Swiss franc slumps amid SNB target talk (Updates prices, adds quotes and graphics)

By Julie Haviv

NEW YORK, Sept 21 (Reuters) - The dollar rose against the euro and yen on Wednesday, buoyed by the appeal of higher short-term rates, after the U.S. Federal Reserve, as widely expected, said it would shift its portfolio in favor 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. For details, see [ID:nS1E78J25W]

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 EUR=. The dollar also hit session highs against the Australian dollar and sterling after the Fed's statement.

"Medium and short run, this policy will have little impact on the economy and even less impact on the dollar," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "This is what was expected." ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For more stories on Fed policy, see [FED/AHEAD]

Graphic-Fed balance sheet: link.reuters.com/cub62s

Graphic-Fed hawks, doves: link.reuters.com/ryv97p

FACTBOX-Doing the Twist and other tools: [ID:nS1E78F0SO] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

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.

Greece adopted yet more austerity measures to secure a bailout installment crucial to avoid running out of money next month, as the International Monetary Fund warned that Europe's sovereign debt crisis risks tearing a giant hole in banks' capital. [ID:nL5E7KL41Q]

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 CHF= and the euro climbed 0.6 percent to 1.2224 francs EURCHF=.

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

The dollar rose 0.3 percent to to 76.64 yen JPY=EBS, but not far from a record low of 75.94 reached last month.

Sterling was down 1.4 percent at 1.5524 dollars GBP= 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. [ID:nAHLKKE73L] (Additional reporting by Nick Olivari, Steven C. Johnson in New York and Anirban Nag in London; Editing by Jan Psachal)

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