* Fed's decision to extend bond purchases undermines U.S.
* Long-term Treasury purchases to start at $45 bln per month
* Dollar at eight-month peak versus yen on BOJ expectations
* Bernanke reiterates no Fed tools to remedy going over
By Daniel Bases
NEW YORK, Dec 12 The euro rose against the U.S.
dollar on Wednesday, adding to gains after the Federal Reserve,
as expected, left benchmark U.S. interest rates unchanged and
said it would extend its bond-buying economic stimulus program.
The Fed's program, which has also kept interest rates in a
range of zero to 0.25 percent for four years, is being beefed up
with a commitment to purchase $45 billion monthly in long-term
U.S. Treasuries. This is in addition to buying $40 billion a
month in agency mortgage-backed securities.
For the first time the Fed tied its monetary policy to a
specific target, saying it will keep benchmark rates near zero
until the jobless rate hits a target of 6.5 percent, at which
point it will reconsider its policy stance. The rate is
currently at 7.7 percent, near a four-year low.
Market expectations for the program were well flagged by
investors and led to losses for the greenback ahead of the Fed's
decision. The extra spending floods financial markets with cash,
reducing the buying power of the U.S. currency.
While the dollar has weakened, one veteran market analyst
says the magnitude of the Fed's moves were probably not fully
priced into the market.
"I don't think the bearishness will manifest itself over the
next week, but I think it will build because the market will
digest the implications of the Fed's balance sheet expanding by
almost 40 percent on a year-on-year basis," Steven Englander,
global head of G10 currency strategy at Citi.
The Fed hopes the cash, which represents new money being
printed versus the expiring "Operation Twist" program that
bought long-term treasuries with the proceeds from the sale and
redemption of short-term debt, will spur extra spending and
investment and result in longer-term hiring.
"Considering the meager success of the past four years in
fostering economic growth with asset purchases, the Fed finds
itself in a policy box with no exit, unable to improve the
economy but afraid to temper its stimulative policies for fear
that the economy will collapse," said Joseph Trevisani, chief
market strategist at Worldwide Markets in Woodcliff Lake, New
"This will have very little impact on the dollar as it is a
continuation of current policies and has already been priced
in," said Trevisani.
In the aftermath of the Fed's announcement, which caused a
sharp decline in U.S. Treasuries prices and a surge
in U.S. stock prices, the euro climbed to a fresh
intra-day high of $1.3096, before slipping back to
$1.3064, a gain of 0.46 percent, according to Reuters data.
Inflation concerns remain low, the Fed said. The central
bank is focusing on a 2 percent inflation rate alongside
conditions consistent with maximum employment. Only then will it
consider a "balanced approach" to tightening monetary policy and
any removal would be relatively gradual, Federal Reserve
Chairman Ben Bernanke said in a press conference.
He reiterated the Fed has no tools available to offset a
tightening of fiscal policies under the so-called "fiscal cliff"
whereby lack of political agreement would result in a $600
billion mix of spending reductions and expiring tax cuts due to
take hold at the start of 2013.
JAPAN STIMULUS PROSPECTS
As the dollar fell against the euro and slumped against
higher-yielding currencies such as the Australian and Canadian
dollars, it maintained its advance against the Japanese yen.
The greenback hit a near nine-month high after the Fed's
decision. Investors are betting the Bank of Japan will implement
more aggressive monetary easing of its own after an election on
Sunday that is expected to yield a victory for the Liberal
LDP leader Shinzo Abe has called for more aggressive
monetary easing in Japan to revive the stagnant economy.
The dollar last traded at 83.14 yen, up 0.76 percent
and just off the session high of 83.22, according to Reuters
data. The euro, already advancing against the yen, surged to a
1.25 percent gain to trade around 108.62 yen, its best
level since April 4.
"It's additional (Quantitative Easing), which should be risk
positive at the margin. Yields are backing up a bit, which
should be supportive for dollar-yen," said Brad Bechtel at Faros
Trading in Stamford, Connecticut.
"It underpins the equity market and, to me, is a nice
framework for a risk rally that I would expect to carry over
into the first quarter. The fiscal cliff is obviously a concern
but if we get through that, it should be risk-positive," he
Another potential factor weighing on the yen was the
successful launch by North Korea of a rocket on Wednesday,
The Australian dollar rose to three-month high
against the greenback. The New Zealand dollar climbed to
its best levels since Feb. 29, while the U.S. dollar slipped to
an eight-week low against its Canadian counterpart.
"The scope for further dollar losses may be somewhat
limited, especially with so much uncertainty in the markets
about the U.S. fiscal cliff. Uncertainty about the euro zone,
concerns about Italy and the Japan election this weekend should
also limit dollar losses," said Omer Esiner, chief market
analyst at Commonwealth Foreign Exchange in Washington, D.C.