Dollar Steady Near Multi Month Lows After Fed Announces QE3

September 13, 2012 CNBC

The dollar pared losses versus the yen and fell against the euro in choppy trade on Thursday, after the Federal Reserve launched another aggressive stimulus program to boost the U.S. economy.

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The Fed said it will buy $40 billion of mortgage debt per month and continue to purchase assetsuntil the outlook for jobs improves substantially.

The dollar [JPY= 77.43 -0.38 (-0.49%) ] last traded at 77.52 yen, down 0.4 percent on the day, after trading at 77.38 prior to the Fed’s statement.

The euro [EUR= 1.2986 0.0087 (+0.67%) ] last traded at $1.2938, up 0.3 percent on the day. It had been trading at $1.2884 prior to the statement.

“The Fed has taken the middle road with a modest, defined contribution purchase program and extended rate guidance,” said Joseph Trevisani, chief market strategist at Worldwide Markets, Woodcliff Lake in New Jersey.

“This is a psychological holding action,” he added. “The Fed cannot cure the economy, only Washington can.”

Fed Chairman Ben Bernanke, at the Fed’s annual conference in Jackson Hole, Wyoming, last month, had stressed the need to bring down the country’s stubbornly high jobless rate and said the U.S. central bank would act as needed to spur the recovery.

“Given Bernanke’s comments at Jackson Hole, the markets [expected] some sort of easing,” said Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, New Jersey.

Lifson noted that the dollar’s sell-off this week has been due to expectations of further monetary stimulus from the Fed. Lifson added it would initially be dollar-negative, but may not have much lasting impact.

Further dollar weakness against the yen would put markets on alert for possible intervention by Japanese monetary authorities to stem the rise in Japan’s currency, traders said. U.S. jobless claims data on Thursday was weaker than expected as new claims hit a two-month high, reinforcing the view on Fed easing, even though producer prices rose more than expected.

The euro remained firm after Germany’s Constitutional Court on Wednesday cleared ratification of the euro zone’s permanent rescue fund, paving the way for the European Central Bank to buy bonds of struggling countries in the region.

The euro rose against the Swiss franc [EURCHF= 1.215 0.0065 (+0.54%) ] to 1.2127 francs, having earlier dipped after the Swiss National Bank said it would maintain its 1.20 franc floor in euro/Swiss. The move disappointed some investors who had speculated the SNB might raise the floor, but analysts said the fact the euro did not sell off heavily was a sign of growing confidence in the ECB’s plan to tackle high borrowing costs in heavily indebted member countries.

Also helping the euro was the result of elections in the Netherlands, where pro-European parties crushed radical fringe groupings, dispelling concerns that euro-skeptics could gain a power base in one of the euro zone’s core states. The euro slid against the yen [EURJPY= 100.57 0.18 (+0.18%) ], trading below 100 yen but not far from Wednesday’s high of 100.64 yen.