CURRENCIES: Dollar Resumes Drop As Fed Meeting Gets Underway
September 22, 2009
The dollar resumed its slide on Tuesday, as global investors again embraced risks, reducing safe-haven demand for the U.S. unit, while traders also took positions as the Federal Reserve began its two-day monetary policy meeting.
The central bank is widely expected to leave interest rates unchanged. But markets will seek out clues on the Fed's asset purchases. The Fed has already announced it plans to wind down its purchases of U.S. government bonds, which have helped keep Treasury yields lower, along with benchmarked commercial interest rates such as mortgage rates.
Any sign that the central bank intends to continue its quantitative easing measures beyond this year could send the dollar "in dangerterritory," according to Ashraf Laidi, currency strategist at CMC Markets. The dollar index (DXY), which measures the greenback against a trade-weighted basket of major currencies, fell to 76.115 from 76.780 Monday night.
Meanwhile, Tuesday's auction of $43 billion of two-year Treasury notes, the first of three auctions of U.S. government debt scheduled for this week, is likely to be the key event on an otherwise light global economic calendar.
"Solid demand at auctions of different maturities this summer suggest today's two-year sale should be fairly well received, though the 6-basis-point drop in yields since the Aug. 25 auction (higher price and more expensive relative to other curve sectors) and a depreciating U.S. dollar could test overseas confidence," they wrote. "All in all, the Fed's determination to keep rates low should keep short-dated paper fairly attractive," the strategists told clients.
Meanwhile, the dollar traded at 91.17 Japanese yen, down slightly from 91.43 yen on Friday.
The Asian Development Bank boosted its growth forecast for the developing nations of Asia, adding to the pro-risk tone, analysts said.
Markets in Japan, Malaysia and Indonesia were closed for public holidays, while other Asian markets posted a mixed finish. The hard-pressed dollar had gained some ground Monday as equity markets weakened, with traders tying a decline in risk appetite to caution ahead of the Fed meeting, as well as the summit of Group of 20 leaders at the end of the week.
But Tuesday's resumption of risk appetite may reflect views in the market that neither event is likely to produce meaningful changes, Maher said. The euro pressed above the $1.48 level for the first time in a year and remained solidly higher at $1.4777, up from $1.4690 late Monday in North American trading. The British pound also gained, up 1% to change hands at $1.6364.
