FOREX-Dollar broadly soft after Fed, yen extends losses

Thu Dec 13, 2012 11:13am IST

* Fed's "QE4" spurs broad dollar weakness

* Euro near highest in a week, pound in six weeks, Aussie in 2 months

* Fed ties policy to specific econ target; extends debt-buying programme

* Yen down across the board, even against USD

* BOJ under intense pressure to ease more decisively

By Hideyuki Sano

TOKYO, Dec 13 (Reuters) - The dollar was on defensive on Thursday after the U.S. Federal Reserve unveiled a fresh bond-buying stimulus programme but the yen languished at nine-month lows against the U.S. currency on expectations of more money printing in Japan.

The Fed surprised markets by explicitly linking its policy path to unemployment and inflation but that had little immediate impact because the Fed's latest economic projections suggested no change in its previous pledge to keep rates near zero until mid-2015.

"We still hold the view that the Fed has fully delivered, and that the numerical targets set a high threshold for the eventual Fed policy exit, which still remains in a very distant future," said Vassili Serebriakov, a strategist at BNP Paribas.

"This implies the Fed is on course to expand its balance sheet substantially, a regime consistent with a weak USD environment."

The dollar index slipped to one-week low of 79.711 after the Fed's decision on Wednesday and last stood at 79.891, flat from late U.S. levels, with a six-week low of 79.568 seen as an immediate support.

As expected, the Fed said it will keep buying $45 billion of government bonds each month after 'Operation Twist' programme expires this month, in addition to buying $40 billion a month in agency mortgage-backed securities.

These bond buying will be funded by essentially creating new money, so the Fed's $2.8 trillion balance sheet will likely increase by around 40 percent in a year.

While the spectre of printing more money weighs on the dollar, how much that stimulus will help the U.S. economy is an open question, with some market players expecting diminishing impact from the Fed's repeated quantitative easing.

"I can't remember shares falling on the day of announcement of previous QE. U.S. bonds also fell even though what the Fed will do is to improve the market's supply-demand dynamics," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

"The market's reaction raises concerns that the market may be becoming more worried about the policy's side effect, which includes deterioration in the Fed's balance sheet," he added.

U.S. shares ended flat, having erased earlier gains, while long-dated U.S. bond prices fell, with 30-year bond yield hitting a five-week high.

As the dollar wilted, the euro hit one-week high of $1.3098 on Wednesday and last stood at $1.3067, little changed on the day.

The euro had additional support after former Italian prime minister Silvio Berlusconi, who roiled the nation last week by abruptly withdrawing support for Prime Minister Mario Monti's technocrat government, offered to stand back and suggested Monti could become the centre-right's candidate.

The Australian dollar hit two-month high of $1.0585 on Wednesday and last stood at $1.0550, flat on the day, while the British pound also hit six-week high of $1.6173 before stabilising at around $1.6140.

The yen, however, bucked the trend and weakened against the dollar, as market players ramped up selling ahead of potentially yen-negative events in coming days.

The dollar rose 0.5 percent to 83.59 percent, edging near its March high of 84.187 yen. The yen also fell to its weakest level in 1 1/2 years against sterling, which fetched 134.88 yen.

The Bank of Japan's Tankan survey is out on Friday and will likely show sentiment among manufacturers deteriorated in the three months to December, adding to calls for bolder action from the BOJ to stimulate the world's third biggest economy.

The BOJ meeting will take place after Sunday's election which looks set to see the opposition Liberal Democratic Party clinch a resounding victory. LDP leader Shinzo Abe has been pushing the BOJ for more powerful monetary stimulus.

Part of the reason for the rise in dollar/yen was higher U.S. Treasury bond yields, which makes the dollar relatively more attractive against its low-yielding Japanese peer.

"Dollar/yen has been moving up for a little while now and you're seeing the trend continue. It gets moved a fair bit by U.S. yields and those moved up despite what the Fed did, shows you a bit of market positioning," said Joseph Capurso, a strategist at Commonwealth Bank.

Elsewhere, the Swiss central bank is expected to keep its cap on the franc at 1.20 franc per euro at its policy announcement at 0830 GMT.

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