Dollar Drops to 4-Month Low Versus Euro Before Fed Meets

By David Goodman and Masaki Kondo - Sep 12, 2012 3:18 PM GMT+0800

 

The dollar weakened to a four-month low against the euro before the Federal Reserve starts a two-day policy meeting today amid speculation it will decide to buy bonds to boost the economy.
The U.S. currency fell versus 11 of its 16 major counterparts after Moody’s Investors Service said yesterday it may cut the country’s Aaa rating. The euro rose for a second day against the yen before Germany’s Federal Constitutional Court issues its ruling on the country’s participation in Europe’s bailout fund. Australian dollar rose to a three-week high after Premier Wen Jiabao signaled China has room to add stimulus.
“The market is discounting another tranche of money printing from the Fed,” said Derek Mumford, a Sydney-based director at Rochford Capital, a currency risk-management company. “That would be negative for the dollar.”

The dollar depreciated 0.1 percent to $1.2873 per euro at 8:03 a.m. London time after falling to $1.2886, the weakest since May 14. The U.S. currency dropped 0.1 percent to 77.85 yen. The euro gained 0.2 percent to 100.21 yen.
The Fed is likely to announce a third round of bond purchases tomorrow, according to almost two-thirds of economists in a Bloomberg survey, while also extending the duration of its zero-interest-rate policy into 2015.
Weak hiring and unemployment exceeding 8 percent pose a “grave concern” and that bond purchases are a policy option, Fed Chairman Ben S. Bernanke said in a speech on Aug. 31.
“Quantitative easing has been 60 to 70 percent priced-in in the market,” said Masato Yanagiya, head of foreign-exchange and money trading in New York at Sumitomo Mitsui Banking Corp.

Negative Outlook

Moody’s, which placed a negative outlook on the U.S. Aaa rating in August 2011, said in a statement yesterday the ranking would probably be cut to Aa1 if no policy is passed to address a mounting debt to gross domestic product.
The dollar weakened 2.1 percent in the past month according to Bloomberg Correlation-Weighted Indexes, which tracks 10 developed-nation currencies tracked by. The euro gained 3.3 percent, and the yen fell 1.5 percent.
Germany is the only country that hasn’t ratified the European Stability Mechanism, a 500 billion-euro fund that offers loans to euro-zone members and may buy their bonds to lower borrowing costs. If today’s court ruling means it can’t join, the mechanism won’t be created and other bailout measures might be thrown into doubt.

Dutch Vote

Dutch voters elect a new parliament today, with a TNS NIPO poll showing yesterday that the opposition Labor Party would take 34 seats, while Prime Minister Mark Rutte’s Liberal Party would win 35.
Results matching the polls may yield a return of the grand coalition that governed for eight years until 2002, making unlikely a shift in direction in Dutch backing for German Chancellor Angela Merkel’s austerity-first approach toward the euro-area financial crisis.

“The most likely outcome is that the Court rules the ESM legal but also imposes conditions on its future use,” Jennifer McKeown, a senior European economist at Capital Economics Ltd. in London, wrote in a research note today. A Liberal-Labor coalition in the Netherlands “would stick to planned austerity measures” and support further bail-outs for peripheral euro- zone governments, she wrote.

Australia’s dollar climbed after Wen said his nation has room for fiscal and monetary measures to support growth and will meet this year’s economic goals. China is Australia’s biggest trading partner.
“China’s slowdown is the biggest downside risk for the Aussie,” said Junichi Ishikawa, a Tokyo-based analyst at IG Markets Securities Ltd. “The currency is likely to be well supported in the long term, however, should we get more stimulus measures from global central banks.”
The Australian currency gained 0.3 percent to $1.0467 after advancing to $1.0489, the strongest level since Aug. 23.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net