December 12, 2012 / 5:00 PM / 5 years ago

FOREX-Dollar pressured with Fed decision ahead; yen struggles

* Dollar comes under pressure before Fed decision

* Hits three-month low versus higher-yielding Aussie dollar

* Fed expected to announce bond buying of $45 billion a month

* But dollar at eight-month peak versus yen on BOJ expectations

NEW YORK, Dec 12 (Reuters) - The U.S. dollar dropped against the euro and high-yielding currencies such as the Australian and New Zealand dollars on Wednesday on expectations the Federal Reserve would opt to pump more money into the U.S. banking system.

But the U.S. currency also reached an eight-month high against the yen on bets the Bank of Japan will implement more aggressive monetary easing after an election on Sunday expected to yield a victory for the Liberal Democratic Party.

The Fed is expected to announce a fresh round of Treasury bond purchases on Wednesday, with many economists forecasting it will opt for monthly purchases of $45 billion.

The risk, analysts said, is that policymakers may decide to buy more than that, which would put the dollar under further broad selling pressure.

“Markets are positioned for a U.S. dollar sell-off based on results of the Federal Reserve meeting set to expand stimulus measures by implementing another bond-buying scheme, while the decision to reduce the size of the program may significantly change the outcome for traders,” said Ilya Spivak, currency strategist at DailyFX in San Francisco.

The euro rose for the third straight session, posting a 0.3 percent advance on Wednesday to $1.3040, well above a low of $1.2878 reached last week and holding gains made after better-than-forecast German economic sentiment data on Tuesday.

Some $4.23 billion in euros had changed hands in the Wednesday session ahead of the Fed announcement, according to Reuters Dealing, compared with $4.847 billion in the entire global session on Wednesday a week ago.

The more dollars the Fed pumps into the market, the more cheaply borrowed funds investors have to invest in assets which give bigger base returns, putting the focus on higher-yielding currencies. The U.S. dollar, the euro, the yen and the pound - the world’s four most liquid currencies - all have near-zero interest rates now.

The Australian dollar rose to a three-month high against the U.S. dollar.

The New Zealand dollar touched its highest since Feb. 29, while the U.S. dollar slipped to an eight-week low against its Canadian counterpart.


The prospect of more monetary easing in Japan continued to hurt the yen, with the dollar rising to an eight-month high . It last traded at 83.13 yen, up 0.8 percent.

The euro climbed to an eight-month high and was last up 1.1 percent at 108.41 yen.

Market players said recent polls showing the opposition Liberal Democratic Party and its smaller ally are heading for a resounding victory in the Japanese election had contributed to the latest bout of yen weakness.

LDP leader Shinzo Abe has called for more aggressive monetary easing in Japan to revive the stagnant economy.

“For the yen that means they will be able to implement stimulus measures and operate more aggressive control of the Bank of Japan, which will all point to further weakening of the yen,” said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank in London.

Jones forecast the dollar to rally to 90 yen by the end of the second quarter of next year.

The successful launch by North Korea of a rocket on Wednesday may also have weighed on the yen, analysts said.

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