Dollar under pressure ahead of Fed decision, yen struggles

NEW YORK Wed Dec 12, 2012 7:37pm IST

U.S. 100 dollar notes are seen at a bank in this picture illustration in Seoul September 20, 2011. REUTERS/Lee Jae-Won

U.S. 100 dollar notes are seen at a bank in this picture illustration in Seoul September 20, 2011.

Credit: Reuters/Lee Jae-Won

NEW YORK (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 February 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.

(Reporting By Nick Olivari; Editing by Kenneth Barry)

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