Dollar Slides Before Fed Meeting on Easing Speculation

By Monami Yui and Mariko Ishikawa - Jun 19, 2012 8:16 AM GMT+0700

The dollar slid against the euro and yen before the Federal Reserve begins a meeting today amid prospects policy makers will consider taking further steps to spur growth in the U.S. economy.

The Japanese currency gained versus most of its 16 major counterparts as Group of 20 leaders meet in Mexico for a second day to discuss Europe’s debt crisis that has spurred investor demand for refuge assets. Spain’s borrowing costs soared to a euro-era record yesterday before the nation sells bills today. Australia’s dollar halted a three-day advance before the Reserve Bank releases minutes of its June meeting when it cut interest rates for a second-straight month.

“There are some expectations that the Fed may extend the Twist program,” Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore, said about the central bank’s operations to lengthen the maturity of its Treasury holdings in a bid to lower borrowing costs. “The Fed may also give some indication that they may do something in the later part of the year. The dollar will come under pressure.”

The dollar declined 0.2 percent to $1.2595 per euro at 10:11 a.m. in Tokyo from yesterday, when it touched $1.2748, the lowest level since May 22. The greenback dropped 0.1 percent to 79 yen. Japan’s currency fetched 99.51 per euro from 99.49. The so-called Aussie bought $1.0120 from $1.0124 yesterday, when it capped a three-day gain of 1.9 percent.

Fed policy makers will bring new forecasts to their two-day meeting starting today and probably will mark down their April central tendency estimate for growth of 2.4 percent to 2.9 percent this year. They will also contend with continuing financial stress in Europe and a U.S. unemployment rate that has remained above 8 percent for 40-consecutive months.

’Risk Management’

All this could prompt them to move away from their outlook for moderate growth and tilt toward a “risk-management” strategy pioneered by former Fed Chairman Alan Greenspan, which puts more emphasis on tracking and containing high-cost threats. Both Janet Yellen, the Fed’s vice chairman, and William C. Dudley, head of the Federal Reserve Bank of New York, used the phrase in the past month.

That insurance may come in the form of extending Operation Twist -- which JPMorgan Chase & Co. and Jefferies & Co. predict -- or an even more aggressive response if Fed officials see high costs in a slowdown of U.S. growth. The $400 billion program, which was announced in September and ends this month, involves selling short-term debt and buying longer-term bonds.

Quantitative Easing

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, or QE, from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy. The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, tumbled 14 percent during that period. The gauge was at 81.838 today, after yesterday touching 81.161, the lowest since May 22.

G-20 chiefs are in Los Cabos, Mexico for a second consecutive summit to be dominated by the crisis in the euro bloc. With Greek elections over the weekend failing to damp the threat of contagion, policy makers are discussing ways to stimulate the world economy if necessary, a Canadian official said.

The crisis escalated on June 9 when Spain asked for a bailout of as much as 100 billion euros ($126 billion) to prop up its banks, becoming the fourth member of the currency union to request international aid.

Spanish 10-year yields yesterday jumped as much as 41 basis points to 7.29 percent, the most since the euro was introduced in 1999 and above the 7 percent level that pushed Greece, Ireland and Portugal to seek rescue packages. Spain is set to auction 12- and 18-month bills today, followed by an offering of bonds on June 21.

-- Editors: Rocky Swift, Garfield Reynolds

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net