Dollar remains on defensive after Fed hint of fresh monetary measures

Dollar remains on defensive after Fed policy hint

LONDON — The dollar remained on the defensive Thursday, a day after falling to near five-month lows against the euro following a hint from the Federal Reserve that it stands ready to provide more assistance to the flagging U.S. economy

By early morning London time, the euro was down around 0.2 percent on the day at $1.3360 as investors booked some of the profits accumulated Wednesday, when it went as high as $1.3440, its highest point since April 27.

The euro rose as much as 3 U.S. cents after the Fed said Tuesday it is “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with its mandate.”

Following that statement, the markets are now anticipating that the Fed will turn on the taps once again at its next rate-setting meeting in early November, and that the fresh supply of dollars will lead to further weakness in the currency.

“For the forward-looking foreign exchange market, this is already becoming apparent and with no significant data to alter the mood, the likelihood is that the dollar sell-off will continue,” said Daragh Maher, deputy head of global foreign exchange strategy at Credit Agricole.

The dollar’s decline Wednesday was not just confined to the euro though. It fell to a low of 84.28 yen, meaning that it has gone a long way to undoing the effects of last week’s unilateral intervention by Japanese authorities in the markets to stem the export-sapping appreciation of the yen.

Even though the dollar advanced modestly to 84.59 yen Thursday, traders remain on the lookout for another intervention from the Japanese monetary authorities — precedent suggests that the Bank of Japan will be back in the markets buying dollars and selling yen.

One currency the dollar has largely held its own against since the Fed statement has been the British pound, and that’s because the Bank of England gave its own hint Wednesday that it was also coming close to sanctioning new monetary measures to boost its economy.

“This in turn undermined the pound which came under pressure along with the dollar as the two currencies jostled for position as the weakest major currency of the last 24 hours,” said Michael Hewson, market analyst at CMC Markets.

By early morning London time, the pound was flat at $1.5645.