* Fed’s decision to extend bond purchases undermines U.S. dollar
* Long-term Treasury purchases to start at $45 bln per month in 2013
* Dollar at eight-month peak versus yen on BOJ expectations
By Daniel Bases
NEW YORK, Dec 12 (Reuters) - The euro extended its gains against the U.S. dollar on Wednesday after the Federal Reserve, as expected, left benchmark U.S. interest rates unchanged and said it would extend its bond- buying economic stimulus program into 2013.
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.
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.
The Fed hopes the cash will spur extra spending and investment and result in longer-term hiring. 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. The rate is currently at 7.7 percent, near a four-year low.
“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 Jersey.
“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 $1.3083, a gain of 0.61 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.
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 Democratic Party.
LDP leader Shinzo Abe has called for more aggressive monetary easing in Japan to revive the stagnant economy.
The dollar last traded at 83.18 yen, up 0.81 percent and just off the session high of 83.22, according to Reuters data. The euro, already advancing against the yen, surged to a 1.49 percent gain to trade around 108.88 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 said.
Another potential factor weighing on the yen was the successful launch by North Korea of a rocket on Wednesday, analysts said.
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.