FOREX-Dollar flat vs euro as "fiscal cliff" overshadows Fed policy

Thu Dec 13, 2012 2:31pm EST

Related Topics

* Fed ties policy to specific economic target

* Fed extends debt-buying in line with expectations

* Speaker of the U.S. House Boehner again rejects Obama's demand

* Yen down across the board on prospects of more easing

By Julie Haviv

NEW YORK, Dec 13 (Reuters) - The dollar held steady against the euro after falling for three straight days on Thursday as a looming U.S. fiscal crisis curbed weakness in the currency after the Federal Reserve announced further monetary stimulus.

The Fed, after its policy meeting ended on Wednesday, matched market expectations by saying it would keep buying $45 billion of government bonds each month after its "Operation Twist" program expires. That is in addition to its purchases of $40 billion a month in agency mortgage-backed securities.

It said interest rates would remain near zero until unemployment falls to at least 6.5 percent. The Fed also explicitly linked its policy path to unemployment and inflation.

Without higher rates or the Fed scaling back the amount of available dollars in the economy, the dollar's upside is limited. It could gain, however, if the White House and Congress cannot reach a deficit reduction deal by the end of the year.

Failure to reach an agreement will automatically trigger massive spending cuts and tax increases in 2013. This so-called "fiscal cliff" should buoy the dollar due to its safe-haven status.

Congressional Republicans dug in on their opposition to raising taxes on the wealthy, even as polls showed them at a growing disadvantage in the U.S. "fiscal cliff" showdown with President Barack Obama.

"We view the Fed decision as notably bearish the dollar, particularly against currencies whose central banks are not engaging in offsetting type monetary policies; however the uncertainty surrounding the looming fiscal cliff dampens the impact near-term but not the medium-term," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The euro was last flat at $1.3074, having hit a session low of $1.3039 and a session high of $1.3100.

With the Fed actively targeting economic data, the dollar could see a boost if data shows any sign of improvement, analysts said. But they also cautioned that the euro could remain supported in the near term with positive developments in the euro zone and successful bond auctions in Italy.

The European Union reached a landmark deal on Thursday to make the European Central Bank the bloc's top banking supervisor, a move that was seen as a step closer to resolving the debt crisis.

YEN FALTERS

Against the yen, the dollar was at 83.56 yen, up 0.4 percent on the day, having hit a near nine-month high of 83.67.

The dollar was expected to rise further against the Japanese currency on expectations the Bank of Japan will ease monetary policy further.

The BOJ meeting will take place after Sunday's election which looks set to see the opposition Liberal Democratic Party clinch a resounding victory. LDP leader Shinzo Abe has been pushing the BOJ for more powerful monetary stimulus.

Part of the reason for the rise in dollar/yen was higher U.S. Treasury bond yields, which makes the dollar relatively more attractive against its low-yielding Japanese peer.

Earlier on Thursday the Swiss franc rose against the euro after the Swiss National Bank left its cap at 1.20 francs per euro but reiterated it was prepared to buy foreign currency in unlimited amounts to maintain it.

The euro was last down 0.2 percent at 1.2083 francs.

FILED UNDER: