Yen, Dollar Strengthen as Fed Stops Short of Buying Treasuries

By Lukanyo Mnyanda and Stanley White

Jan. 29 (Bloomberg) -- The yen and the dollar rose after the Federal Reserve declined to provide more information about buying Treasuries to help boost the economy, fueling speculation investors will favor the currencies as a refuge.

The euro dropped the most in almost a week against the dollar after European Central Bank President Jean-Claude Trichet signaled yesterday policy makers won’t lower interest rates before March, stoking concern the region’s slowdown will be prolonged. New Zealand’s dollar declined to a six-year low versus the U.S. currency after the country’s central bank cut the official cash rate more than most economists forecast.

“The Fed was a bit more cautious than people expected and the dollar rose accordingly,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. “The world is going to have to get used to a stronger yen.”

The yen strengthened to 117.55 per euro as of 9:41 a.m. in London, from 118.88 yesterday in New York. The euro lost as much as 1.1 percent versus the dollar, the most since Jan. 23, and was at $1.3047, from $1.3166 yesterday. The yen was at 90.08 versus the dollar, from 90.26 yesterday, when it weakened to a one-week low of 90.75.

The Japanese currency may trade between 85 and 90 per dollar and about 115 to the euro this quarter, Mellor said.

New Zealand’s dollar traded at 51.43 U.S. cents, from 52.43 cents yesterday. The kiwi, as the currency is known, earlier touched 51.31 cents, the lowest level since December 2002. The Reserve Bank of New Zealand cut its target lending rate by 1.5 percentage points today.

Fed Policy

The Fed kept its target rate for overnight loans between banks in a range of zero to 0.25 percent at a meeting yesterday.

Standard & Poor’s 500 Index futures fell 1.6 percent and Europe’s Dow Jones Stoxx 600 Index lost 1.9 percent. The cost of protecting the region’s corporate bonds from default rose.

“We continue to expect a return to risk aversion to lead to a stronger dollar and yen,” analysts led by David Woo of Barclays Plc wrote in a research note today. “We maintain our view that it will be difficult for equities for rally while bad assets remain on banks’ balance sheets.”

The Fed last cut its target lending rate Dec. 16 and shifted its focus to the amount and type of debt it buys, seeking to revive credit markets after financial institutions worldwide posted $1 trillion in losses on mortgage-related securities since the start of 2007. 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

ECB President Trichet said yesterday in an interview on Bloomberg Television in Davos, Switzerland, 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 also dropped before a European Commission report economists say will show business and consumer sentiment fell to a record low. The index of executive and consumer sentiment declined to 65.4 in January, the lowest since it started in 1985, according to a Bloomberg News survey of 10 economists. The report is scheduled for release at 11 a.m. in Brussels.

“Any upside surprise in today’s raft of sentiment indicators from the European Commission could give some more muscle to the euro,” a team of Societe Generale SA strategists led by Vincent Chaigneau in London wrote in a report today. “However, any such strength is unlikely to be sustained.”

The odds the ECB will lower its 2 percent main rate by a quarter-percentage point at its Feb. 5 meeting were 65 percent today, according to a Credit Suisse Group index based on overnight swaps.

The Japanese yen may weaken against the U.S. dollar and eight more of the world’s most-traded currencies as riskier foreign-exchange trades revive, Citigroup Inc. analysts said, citing technical charts.

The U.S. dollar looks to be forming a so-called double bottom, meaning any advance above 94.65 yen probably would be followed by a surge to as high as 102 yen, analysts led by New York-based Tom Fitzpatrick, Citigroup’s chief technical analyst, said in a report dated yesterday.

A double bottom forms when a security makes two consecutive troughs of about the same depth, and indicates potential for a rebound.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net