GLOBAL MARKETS-Dollar slides as Fed QE3 looms, stocks subdued

Thu Sep 13, 2012 8:30am EDT

* Dollar index hovers near four-month lows
    * Markets expect stimulus from Fed, announcement at 1630 GMT
    * Global, European shares slip back after recent gains

    By Marc Jones
    LONDON, Sept 13 (Reuters) - The dollar tumbled to its lowest
level since early May and stock and bond markets curbed some of
their resurgent appetite for risk on Thursday as investors
waited to see whether the U.S. Federal Reserve announces a new
round of money printing.
    As the dollar suffered from expectations for QE - which
would be equal to printing money and diluting the value of the
currency - the euro stayed near four-month highs against the
U.S. currency, helped by the signs the euro zone may be starting
to get on top of its debt troubles. 
    "Any good will towards risk assets, probably more so in FX
land, could be undone pretty quickly if Ben Bernanke fails to
live up to what is expected of him and the Fed board today,"
said Chris Weston, trader at IG Markets.
    A Reuters poll showed economists raised their bets of a
third round of Fed bond buying known as quantitative easing (QE)
to 65 percent from 60 percent in August. 
    Fed expectations and the potential for a rise in tensions in
the Middle East following the killing of the U.S. ambassador in
Libya kept oil prices near $116, consolidating a 30 percent rise
since late June. Gold prices hovered at 6-month highs. 
    The MSCI index of global shares was down 0.3 percent ahead
of the U.S. open, retreating from a five-month high reached on
Wednesday after a German court gave the green light to the euro
zone's new bailout fund.
    Shares in London, Paris and Frankfurt
 were all in the red and the S&P 500, which has risen 9
percent since June - well below the 20 percent surge in European
bluechips - was seen opening slightly lower with
investors twitchy about the Fed. 
    Markets were also braced for a deluge of U.S data, from
employment to producer prices. 
    The Fed decision is expected to be released at 1630 GMT,
followed by Chairman Ben Bernanke's news conference about two
hours later.
    German Bunds rose as selling on Wednesday was considered
overdone, but gains could be wiped out if the Fed disappoints.
    "It will be a massive disappointment if they don't do
anything. We're looking for QE3 and some extension of the zero
interest rate policy. If we don't get that it's probably going
to be another excuse for Bunds to sell off," a London-based bond
market trader who requested anonymity, said.
    
 

    ECB WARNING
    The Fed's announcement on a potential new round of
mortgage-based purchases is seen by many economists as a welcome
move but one that is unlikely to have a sustained long-term
benefit for the economic environment.
    Europe's ability to overcome its debt troubles remains the
central focus. Hopes that the European Central Bank's
bond-buying plans could stabilise matters saw South Korea's
central bank unexpectedly leave interest rates steady on
Thursday while New Zealand, Indonesia and the Philippines also
stood pat at policy meetings. 
    Switzerland's central bank pledged to keep the safe-haven
Swiss franc pegged firmly below 1.20 per to the euro, saying it
too was waiting to see how things developed in the euro zone.
    A new study published in the ECB's monthly report warned
that Spain's debts could hit 104 percent of its economic output
by 2016 if it only manages to achieve half of its fiscal repair
targets, while in Italy debts could peak at 125 percent.
    "This underlines the importance of governments living up to
their commitments," the ECB said. "Failing to achieve this
target will immediately give rise to substantial risks for debt
sustainability."
    The central bank's recently announced plans to buy troubled
government debt in potentially unlimited quantities helped Italy
secure its lowest three-year borrowing costs in almost two years
and sell a 15-year bond for the first time in over 12 months.
    "Relative to market levels everything has gone at least 5
basis points in yield terms than they were in the secondary
market ... it's very good by Italian standards," said Marc
Ostwald, a strategist at Monument Securities.   
    "It really does go to show how much optimism there is on the
back of the OMT (ECB bond-buying plan)." 
    EU/IMF bailout poster-child Ireland also continued to feel
its way back into the open market and saw its borrowing costs
halve at another auction of three-month paper.
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