BLBG: 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 0.2 percent to $1.4572 per euro at 7:48 a.m. in New York, from $1.4538 yesterday, when it reached $1.4504, the highest since Oct. 2. The U.S. currency was at 89.60 yen, from 89.61 yesterday, when it traded at 89.95, the strongest level since Dec. 7. The yen bought 130.58 per euro, from 130.29.
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.
Fed funds futures on the Chicago Board of Trade indicate 51 percent chance that the Fed will raise its target lending rate by at least a quarter-percentage point by its June meeting, compared with 36 percent odds a month ago.
‘Expansionary Segment’
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.
“They are now above their previous cyclical lows,” Battellino 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 89.97 cents.
European Debt Woes
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.
The euro had slipped 1 percent against the dollar in the past five days amid concern some of the region’s weakest economies will struggle to pay debt as their budget deficits increase. Greece sold 2 billion euros of bonds directly to banks yesterday as it seeks to bolster its finances, according to two bankers familiar with the transaction.
Greece had its debt downgraded eight days ago to BBB+, the lowest in the euro region, by Fitch Ratings. Spain had the outlook on its AA+ debt rating cut to “negative” from “stable” by Standard & Poor’s. The ratings company also revised Portugal’s outlook to “negative” from “stable.”
The Norwegian krone rose against all but three of the 16 most-traded currencies on speculation Norway’s central bank will signal a withdrawal of stimulus measures following a policy meeting today. The currency strengthened to 5.7853 per dollar, from 5.8226 yesterday.
“We expect the Norges bank to maintain a relatively more hawkish tone compared to that of the Riksbank,” a team of currency strategists BNP Paribas SA led by Hans-Guenter Redeker in London wrote in a research note today.
To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Anna Rascouet in London at arascouet@bloomberg.net
