Dollar hammered as Fed confounds markets with no stimulus cut
SYDNEY (Reuters) - The dollar languished at a seven-month low against a basket of major currencies in Asia on Thursday after the Federal Reserve wrong footed many investors who had positioned for a scaling back in its massive stimulus program.
The dollar index .DXY slid 1.2 percent overnight, its biggest one-day slide in more than 2 months, after the Fed maintained its $85 billion monthly asset-buying program, confounding expectations of a reduction by roughly $10 billion.
It has fallen to levels seen well before Fed Chief Ben Bernanke first floated the idea of tapering the stimulus back in May.
"The Committee had underestimated the impact on longer-term rates and is now trying to get the genie back in the bottle," said Philip Marey, senior U.S. strategist at Rabobank.
Indeed, Fed Chairman Ben Bernanke refused to commit to begin reducing the bond purchases this year. As well, the central bank cut its growth forecasts for 2013 and 2014, citing strains in the economy from tight fiscal policy and higher mortgage rates.
The surprise decision saw U.S. Treasury yields tumble while riskier assets, particularly emerging markets, staged a barnstorming rally.
U.S. benchmark yields dropped to a one-month low of 2.673 percent, well off highs around 3.01 percent set earlier in the month.
The dollar skidded to a three-week low of 97.76 yen before drifting back a bit of 98.24. The euro shot up to a near eight-month high of $1.3543, bringing the February 1 peak of $1.3711 back in focus.
Higher-yielding currencies also fared well with the Australian dollar soaring to three-month highs of $0.9530. That was unlikely to be welcomed by the Reserve Bank of Australia which has repeatedly said it wanted to see a weaker currency help spur parts of the domestic economy.
The Aussie was now flirting with resistance around $0.9506, a level representing the 38.2 percent retracement of its April to August drop.
Latin American currencies including the Mexican peso and Brazilian real all powered higher against the greenback, paving the way for many of Asia's emerging market currencies to also rise.
But once the dust settles, traders said markets will no doubt start to speculate on when the Fed will begin to taper its stimulus, giving the dollar a bit of support.
There are only two more scheduled policy meetings this year, one in October and one in December.
Barclays Capital analysts now believe the Fed will begin to taper in December and they expect the Fed to end its asset purchase program in June 2014, three months later than their previous prediction.
"The delay in unwinding the asset purchase program also leads us to delay our expectation of the first rate hike; we now expect that in June 2015, later than our previous expectation of March 2015," they wrote in a note.
(Editing by Shri Navaratnam)
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