The dollar fell to a three-week low against the euro as Federal Reserve policy makers prepare to discuss interest rates and bond purchases.
The greenback dropped against 13 of its 16 major counterparts on speculation the Fed may signal today it’s open to increasing debt purchases beyond the $600 billion already announced. New Zealand’s dollar reached a 10-year low against Australia’s currency after a report showed retail sales in the smaller nation slid by the most since 1997. Taiwan’s dollar climbed to a 13-year high.
“Expectations aren’t for anything particularly dramatic to come out of the Fed meeting today, but you can’t entirely discount that,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “As people are looking at trends for 2011 they’re realizing that although there may be plenty of slips on the way to resolving the euro crisis, it will be resolved. Therefore if you’re looking at where the prime issue will be in 2011, it probably will be the U.S.”
The U.S. currency dropped 0.5 percent to $1.3460 per euro as of 10:37 a.m. in London, after sliding 0.6 percent to the weakest since Nov. 23. The dollar declined 0.2 percent to fetch 83.21 yen from 83.39 yen. Japan’s currency was 111.85 per euro, after earlier weakening to 112.19.
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, extended yesterday’s declines by 0.3 percent. U.S. 10-year Treasury yields rose two basis point to 3.29 percent.
Fed’s QE
The Fed today “may emphasize it will continue the current quantitative easing, citing the unemployment rate and sluggish inflation,” strategists at Barclays Bank Plc, led by Tokyo- based chief currency strategist Masafumi Yamamoto, wrote in a note. “Such a statement is likely to weigh on U.S. mid-, long- term yields and the dollar, especially against the yen.”
Further government bond purchases by the Fed are “certainly possible,” Chairman Ben S. Bernanke said in an interview broadcast on CBS Corp.’s “60 Minutes” on Dec. 5, referring to the bank’s so-called quantitative easing program.
Moody’s Investors Service Inc. yesterday said the U.S. tax- cut package up for a procedural vote in the Senate is likely to boost economic growth in the next two years but will “adversely affect” the budget deficit.
Tax Package
Obama’s deal, announced Dec. 6, includes a two-year extension of tax rates in return for extending long-term jobless benefits for 13 months and cutting the payroll tax for $120 billion for a year.
“Unless there are offsetting measures, the package will be credit-negative for the U.S. and increase the likelihood of a negative outlook on the U.S. government’s Aaa rating during the next two years,” Moody’s Senior Credit Officer Steven Hess wrote in a note yesterday.
The euro gained as German investor confidence rose more than forecast for a second month, indicating the recovery in Europe’s largest economy may be broadening.
A ZEW Center for European Economic Research index of German investor and analyst expectations increased to 4.3 this month from 1.8 in November. ZEW’s gauge measuring sentiment in the current situation rose to 82.6 from 81.5, falling short of economist expectations.
‘Flash in the Pan’
The euro’s advance versus the dollar may be a “flash in the pan” because European officials risk failing to fix the region’s debt crisis and the Federal Reserve is unlikely to announce more asset purchases, Commerzbank AG analysts said.
“Those who had banked on additional quantitative-easing measures might be disappointed” at today’s meeting of U.S. policy makers, a team of analysts led by Ulrich Leuchtmann in Frankfurt wrote in a note to clients today.
The dollar has fallen 2.3 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The euro has dropped 9 percent. The yen is up 10.6 percent.
New Zealand’s retail sales declined 2.5 percent in October, Statistics New Zealand said in Wellington. The drop was the biggest since May 1997.
“The kiwi fell quite sharply in response to a big fall in retail sales,” said John Kyriakopoulos, head of currency strategy in Sydney at National Australia Bank Ltd., the nation’s largest lender. “What’s been happening is the market has been pushing out the timing for when the Reserve Bank of New Zealand will raise rates again.”
New Zealand’s dollar touched NZ$1.3288 per Aussie dollar today, the weakest since November 2000, before trading at NZ$1.3236.
Taiwan’s dollar gained 0.5 percent to NT$29.900, the strongest level since October 1997. Global funds bought $1.3 billion more local shares than they sold this month through yesterday, boosting net purchases for the year to $7.8 billion.
“Strong foreign inflows and solid economic growth are drivers of the Taiwan dollar’s gain,” said Henry Lin, a Taipei- based foreign-exchange trader at Taiwan Shin Kong Commercial Bank. “The central bank won’t allow such a big rise in the currency. It’ll come in to smooth the moves very soon.”
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