Dollar Trades at Almost Five-Week Low Before Fed’s Statement

By Ben Levisohn

Jan. 27 (Bloomberg) -- The dollar traded at almost a five- week low against the yen before the Federal Reserve’s policy statement, which is forecast by analysts to maintain a pledge to hold interest rates at virtually zero for an extended period.

“The Fed is having to walk a fine line now,” said Omer Esiner, a senior foreign-exchange analyst in Washington at Travelex Global Business Payments, a currency exchange network. “There’s a lot of political pressure to signal that they’ll keep rates low for the foreseeable future, and the market is getting anxious that there hasn’t been an articulated exit.”

Sterling rose versus all of its 16 most-traded counterparts on speculation the Bank of England will halt its bond-purchase program. The euro was at almost six-month low versus the dollar as New York University Professor Nouriel Roubini, who predicted the financial crisis, said he’s never been more pessimistic about the European monetary union’s future.

The dollar fell 0.2 percent to 89.48 yen at 8:58 a.m. in New York, from 89.65 yesterday. It traded earlier at 89.14, the lowest level since Dec. 18. The U.S. currency was little changed at $1.4057 per euro, compared with $1.4072. It touched $1.4022, the strongest level since July 30. The euro dropped 0.3 percent to 125.78 yen, from 126.16, after reaching 125.24, the lowest level since April 28.

The greenback weakened versus the yen on speculation the Fed reiterate that interest rates will stay low, discouraging demand for dollar-denominated assets. The Fed may acknowledge growth accelerated last quarter while noting that tight credit and unemployment at almost a 26-year high still pose risks.

Roubini on Euro

Spain represents a looming threat to the ability of the euro region to hold together, said Roubini in a Bloomberg Radio interview from the World Economic Forum’s annual meeting in Davos, Switzerland.

“Down the line, not this year or two years from now, we could have a breakup of the monetary union,” Roubini said. “It’s a rising risk.”

Speculation of a breakup has mounted in financial markets as Greece struggles to cut the continent’s biggest budget deficit and countries from Spain to Ireland face rising debt.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said in Luxembourg today there is no risk of a state bankruptcy for Greece and the possibility of the nation’s leaving the euro region is “an absurd theory.”

The common currency pared declines versus the dollar as the European Central Bank council member Axel Weber said policy makers may take further steps in the first half of this year to withdraw stimulus measures as the economy gathers strength.

Germany’s Inflation

German consumer prices, calculated using a harmonized European Union method, fell 0.4 percent this month after rising 0.9 percent in December, according to the median forecast of 21 economists in a Bloomberg News survey. The report from the Federal Statistics Office is due later today.

The pound rose 0.5 percent to $1.6224 on speculation the Bank of England will announce a pause in its 200 billion-pound ($323 billion) bond-purchase program next week. Sterling advanced 0.5 percent to 86.74 pence per euro.

Bank of England policy maker Andrew Sentance said the Monetary Policy Committee must be ready to shift gears as the economic recovery strengthens.

“The Bank of England will soon stop buying gilts, and that will help the pound,” said John Hydeskov, a currency strategist at Danske Bank A/S in Copenhagen.

The Fed will keep its target rate for overnight bank loans between zero and 0.25 percent today, according to all 93 economists surveyed by Bloomberg.

Fed Rate Outlook

Futures on the CME Group exchange indicate traders have been cutting bets the Fed will raise its target lending rate by June. The odds of an increase of at least a quarter-percentage point were 21 percent, down from 26 percent a week ago.

“Policy makers will maintain the status quo this time,” said Takako Masai, general manager of the capital markets division at Shinsei Bank Ltd. in Tokyo. “They are unlikely to change their economic outlook because U.S. economic reports haven’t been good.”

To contact the reporter on this story: Ben Levisohn in New York at blevisohn@bloomberg.net