November 5, 2009 / 12:05 AM / in 9 years

FOREX-Dollar pressured by Fed's pledge on low rates

* USD resumes fall, Fed keeps “extended period” pledge

* High-yielders back in favour

* Focus now on ECB, BoE rate decisions

By Anirban Nag

SYDNEY, Nov 5 (Reuters) - The U.S. dollar was under pressure on Thursday, moving towards recent multi-month lows on a basket of currencies, after the U.S. Federal Reserve’s reiterated its committment to keep rates low for months to come.

U.S. fed funds futures <0#FF:> trimmed chances of a rate hike after Fed’s pledge to near zero for an ‘extended period’, a decision traders say is likely to fuel leveraged carry trades and boost demand for high-yielding currencies like the Australian and New Zealand dolalrs.

“I do not think the Fed signalled any change,” said Richard Grace, chief currency strategist at Commonwealth Bank of Australia. “The policy guidance remains the same. I think the downtrend in the U.S. dollar is intact and we could see the dollar index fall to around 74 in the short term.”

The U.S. dollar index =USD, which measures the dollar’s value against a basket of currencies, was down 0.83 percent at 75.751, retreating from Tuesday’s one-month high of 76.817. It hit a 14-month low of 74.95 on Oct. 23, and a break below 75.19 would open it to a test of that level.

But investors are likely to stay wary about selling dollars too aggressively as the Fed appeared to be more confident about an economic recovery in its latest statement. [ID:nN04453484]

“While this situation supports continued efforts at accommodation, credit easing is being capped off and officials are focusing more explicitly on conditions that would signal a retreat,” said Robert DiClemente, chief U.S. economist at Citi.

The Fed in its latest statement introduced a checklist of variables that are likely to play an important role in determining how long the unusual accommodation will be in place.

Specifically, the statement listed low rates of resource utilization, subdued inflation trends, and stable inflation expectations as factors that would warrant exceptionally low rates.

Analysts said a change in these factors could see the Fed start tightening policy.

The Fed also said it has decided to reduce the size of its agency debt purchases to $175 billion from the previously announced $200 billion.

Analysts said this should not be seen as part of an exit strategy. Rather the decision was made because there was limited availablity of agency debt in the secondary market.

For more on Fed statement click on [ID:nTRU000422]

The euro EUR= was holding to most of it gains at $1.4865, having added more than 1.0 percent on Wednesday. All eyes will be on the European Central Bank's rate decision later in the day. [ECB/INT].

The pound GBP=D4 was marginally lower at $1.6550 ahead of a Bank of England (BoE) policy decision. Most expect the BoE to expand its quantitative easing policy by at least 25 billion pounds, while keeping key interest rates unchanged at a record low of 0.5 percent.

The yen JPY=, another currency used to fund carry trades, was also under pressure. It was slightly weaker on the dollar at 90.68 yen, having lost 0.3 percent on Wednesday. The euro was holding sharp gains on the yen EURJPY=R at 134.75 yen, having jumped over 1.4 percent in the previous session.

Meanwhile, the Aussie AUD=D4 hovered near 91 U.S. cents, with all eyes on Reserve Bank of Australia's Governor Glenn Stevens' speech at 0555 GMT. The Australian central bank earlier this week raised its cash rate by 25 basis points, but markets are uncertain if it will move again in December.

Editing by Wayne Cole

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