By Stanley White and Ron Harui
Jan. 29 (Bloomberg) -- The dollar rose against the euro and the pound as the Federal Reserve said at a policy meeting it is ready to buy longer-term government bonds to improve credit markets and boost the world’s largest economy.
The greenback may also strengthen against the yen after the U.S. House passed President Barack Obama’s $819 billion stimulus package. The New Zealand dollar touched a one-week low after the country’s central bank cut the official cash rate more than most analysts forecast to a record low of 3.5 percent.
“The dollar can squeeze higher,” said Osao Iizuka, head of currency trading in Tokyo at Sumitomo Trust & Banking Co., Japan’s fifth-largest bank by market value. “The Fed has laid out the framework for future policy, and that’s a relief. We’ll need to see how this benefits the real economy. Risk appetite may improve.”
The dollar advanced to $1.3114 per euro as of 11:22 a.m. in Tokyo from $1.3166 late yesterday in New York. Against the pound, the greenback appreciated to $1.4189 from $1.4247. The dollar traded at 90.21 yen from 90.26 yen yesterday, when it reached a one-week high of 90.75 yen. The euro bought 118.32 yen from 118.88 yen. The dollar may advance to 91 yen today, Iizuka said.
New Zealand’s dollar traded at 52.02 U.S. cents from 52.41 cents late yesterday in New York. The kiwi, as the currency is known, touched 51.90 cents after the Reserve Bank of New Zealand cut its target lending rate by 1.5 percentage points, forecast by only three of 13 economists surveyed by Bloomberg News. The rest predicted a reduction of 1 percentage point.
Fed Policy
The Fed is “prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Federal Open Market Committee said in a statement after meeting in Washington yesterday. Policy makers maintained the target lending rate in a range of zero to 0.25 percent.
Sterling fell to $1.4185 from $1.4247. The pound plunged to $1.3503 on Jan. 23, the lowest level since September 1985, after the government announced a second bank bailout in three months, sparking concern the U.K. will have to widen its budget deficit.
“I did actually foresee the fall in sterling, and that was one of the positions we carried,” said George Soros, who gained fame more than 16 years ago when he broke the Bank of England’s defense of the currency. Below $1.40, “it seemed to me the risk- reward was no longer clear,” he told reporters yesterday at the World Economic Forum in Davos, Switzerland.
Stimulus Package
Obama’s stimulus bill will go to the Senate, where Republicans who want more tax cuts and less spending have more power to demand changes. The Federal Deposit Insurance Corp., chaired by Sheila Bair, may manage a bad bank that would buy assets clogging banks’ balance sheets, two people familiar with the matter said. The initiative may allow the government to rewrite some of the mortgages that underpin bad debt.
“Obama’s package may result in the U.S. coming out of recession first,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe General SA, France’s third-largest bank by market value. “This is positive for the dollar,” which may rise to 91 yen and $1.30 per euro today, he said.
The ICE’s Dollar Index, which tracks the dollar versus the euro, the yen, the pound, the Canadian dollar, the Swedish krona and the Swiss franc, increased 0.2 percent today to 84.802 after advancing 6 percent in 2008.
The Fed cut its target lending rate on Dec. 16 to as low as zero and shifted its focus to the amount and type of debt it buys, seeking to revive credit markets. The central bank began this month a $500 billion program to buy Fannie Mae, Freddie Mac and Ginnie Mae mortgage securities, pushing down the yields on mortgage bonds relative to Treasuries.
Trichet on Rates
European Central Bank President Jean-Claude Trichet said in an interview on Bloomberg Television at the forum in Davos before the Fed’s announcement that “very, very low” interest rates “have some inconveniences.”
He reiterated that the ECB’s next important meeting is in March, signaling policy makers won’t cut interest rates next week. The central bank lowered its benchmark rate on Jan. 15 by a half- percentage point to 2 percent, matching a record low.
The euro may extend this month’s 5.9 percent loss versus the dollar as the European index of executive and consumer sentiment declined to 65.4 in January, the lowest since the index started in 1985, according to a Bloomberg News survey of economists. The European Commission will release the report at 11 a.m. in Brussels.
“The eurozone economy is slowing sharply and the ECB will have more monetary easing to do,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “The underlying trend will remain to the downside for the euro.”
The odds the ECB will lower its 2 percent main rate by a quarter-percentage point at its Feb. 5 meeting were 68 percent yesterday, compared with 65 percent on Jan. 27, according to a Credit Suisse Group index based on overnight swaps.
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
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