FOREX-Dollar under pressure ahead of Fed decision, yen struggles

Wed Dec 12, 2012 7:34pm IST

* Dollar comes under pressure before Fed decision

* Hits 3-month low versus higher-yielding Aussie dollar

* Fed expected to announce bond buying of $45 billion a month

* But dollar at 8-month peak versus yen on BOJ expectations

NEW YORK, Dec 12 (Reuters) - The U.S. dollar fell against the euro and high-yielding currencies such as the Australian and New Zealand dollars on Wednesday on expectations the U.S. Federal Reserve would opt to pump more money into the banking system.

But the U.S. currency also reached an eight-month high against the yen on bets the Bank of Japan will implement more aggressive monetary easing after an election on Sunday expected to yield a victory for the Liberal Democratic Party.

The Fed is expected to announce a fresh round of Treasury bond purchases later on Wednesday, with many economists forecasting it will opt for monthly purchases of $45 billion.

The risk, analysts said, is that policymakers may decide to buy more than that, which would put the dollar under further broad selling pressure.

"All eyes are on the Fed and that has clearly been the driver for this week, at least with the dollar down across the board," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C. "We're seeing high yielders like the aussie and kiwi benefit on expectations of further central bank easing."

The euro rose for the third straight session, posting a 0.3 percent advance on Wednesday to $1.3038, well above a low of $1.2878 reached last week and holding gains made after better-than-forecast German economic sentiment data on Tuesday.

The more dollars the Fed pumps into the market, the more cheaply borrowed funds investors have to invest in assets which give bigger base returns, putting the focus on higher-yielding currencies. The U.S. dollar, the euro, the yen and the pound - the world's four most liquid currencies - all have near zero interest rates now.

The Australian dollar rose to a three-month high against the U.S. dollar.

The New Zealand dollar touched its highest since Feb. 29, while the U.S. dollar slipped to an eight-week low against its Canadian counterpart.

YEN SEEN AS VULNERABLE

The prospect of more monetary easing in Japan continued to hurt the yen, with the dollar rising to hit an eight-month high , just shy of reported options barriers at 83.00 yen. It last traded at 82.89 yen, up 0.4 percent.

The euro climbed to an eight-month high and was last up 0.7 percent at 108.05 yen.

Market players said recent polls showing the opposition Liberal Democratic Party (LDP) and its smaller ally are heading for a resounding victory in the Japanese election had contributed to the latest bout of yen weakness.

LDP leader Shinzo Abe has called for more aggressive monetary easing in Japan to revive the stagnant economy.

"For the yen that means they will be able to implement stimulus measures and operate more aggressive control of the Bank of Japan, which will all point to further weakening of the yen," said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank in London.

Jones forecast the dollar to rally to 90 yen by the end of the second quarter of next year.

The successful launch by North Korea of a rocket on Wednesday may also have weighed on the yen, analysts said.

REUTERS SHOWCASE

WTO Trade Deal

WTO Trade Deal

WTO clinches first global trade deal in its history  Full Article 

Kashmir Attack

Kashmir Attack

Ten dead in Kashmir's worst militant attack in more than a year  Read 

OPEC Meeting

OPEC Meeting

Saudis block OPEC output cut, oil price sinks further.  Full Article 

GDP, RBI Preview

GDP, RBI Preview

GDP growth set to weaken, business wants reforms more than rate cut  Full Article | Related Story 

Social Media

Social Media

Twitter to start tracking users' mobile apps  Full Article 

Jaitley to Rajan

Jaitley to Rajan

Jaitley likely to meet Rajan on Monday to urge rate cut  Full Article 

Banking Sector

Banking Sector

India moves to allow more businesses to offer basic financial services.  Full Article 

Forever21 in India

Forever21 in India

Forever21 sets sights on Indian cities, but please hold the hot pants  Full Article 

Japan Economy

Japan Economy

Japan inflation slows in October, output and spending show signs of recovery  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage