Dollar Drops Versus Euro as Fed Expected to Keep Rates Steady

By Ben Levisohn and Anna Rascouet

Dec. 16 (Bloomberg) -- The dollar weakened against the euro on speculation the Federal Reserve may indicate the recovery is gaining strength while repeating a pledge to keep the benchmark interest rate almost at zero for an extended period.

The greenback reached a two-month high versus the shared European currency yesterday on expectations economic growth will prompt policy makers signal they’re ready to withdraw stimulus measures. Australia’s dollar slumped against all 16 of the most traded currencies as central bank Deputy Governor Ric Battellino damped expectations for further rate increases.

“We’ve had a strong dollar that was driven by the economic data and the market priced in a series of rate hikes over the next 12 months,” said Marcus Hettinger, a currency strategist in Zurich at Credit Suisse Group AG. “The Fed will probably stick to their message. That’s negative for the dollar.”

The dollar fell 0.3 percent to $1.4577 per euro at 7:30 a.m. in London, from $1.4538 in New York yesterday, when it reached $1.4504, the highest since Oct. 2. The U.S. currency was at 89.51 yen, from 89.61 yesterday, when it traded at 89.95, the strongest level since Dec. 7. The yen bought 130.54 per euro, from 130.29.

Housing, Consumer Prices

U.S. builders broke ground on 574,000 houses in November at an annual pace, up 8.5 percent, according to a Bloomberg News survey of economists before the data’s release today. Consumer prices rose 0.4 percent in November, after a 0.3 percent gain in the previous month, according to a separate survey. Producer prices climbed 1.8 percent last month, the government said yesterday, more than twice the median estimate.

Fed funds futures on the Chicago Board of Trade indicated yesterday a 53 percent chance that the Fed will raise its target lending rate by at least a quarter-percentage point by its June meeting, compared with 48 percent odds the day before.

All 98 economists in a Bloomberg survey expect the Fed will keep the target lending rate at zero to 0.25 percent when it releases its statement at the close of its meeting today.

Australia’s currency fell after the Reserve Bank of Australia’s Battellino said borrowing costs for households and businesses have risen faster than the central bank’s target rate. Benchmark interest rates are 3.75 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S.

‘Expansionary Segment’

“They are now above their previous cyclical lows,” he said. “It would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range.”

The Aussie also fell after the nation’s Bureau of Statistics said gross domestic product gained 0.2 percent in the third quarter from the previous period, below the median estimate by economists.

The currency sank as much as 1.2 percent to 89.56 U.S. cents, the lowest since Nov. 27, before trading at 90.06 cents.

Demand for the euro may be limited after European Central Bank council member Ewald Nowotny said he sees no need to raise interest rates in the first half of 2010 as inflation pressures stay muted.

“Our interest rate decisions are to be seen in connection with our price stability goal and in this context I do not see major threats for price stability in the near future,” Nowotny, 65, said in an interview in Vienna.

To contact the reporters on this story: Anna Rascouet in London at arascouet@bloomberg.net