Dollar hits 7-month high after Fed’s Operation Twist

TOKYO - The dollar surged to a seven month high against major currencies boosted by the appeal of higher short-term rates on US bonds after the US Federal Reserve said it would shift its portfolio in favour of long-term debt.

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Published: Thu 22 Sep 2011, 3:53 PM

Last updated: Tue 7 Apr 2015, 8:19 AM

The dollar was also bolstered by “safe-haven” inflows, as the Fed failed to satisfy those hoping for bolder monetary easing, sending shares, commodities and risk-related currencies such as the euro and the Australian dollar tumbling.

The Fed unveiled a programme, dubbed “Operation Twist”, putting more downward pressure on long-term interest rates in a bid to help the ailing housing sector.

An important dollar-positive by-product of the Fed’s programme is higher short-term rates. Another factor supporting the greenback is the Fed’s decision not to increase the money supply, sending the dollar index to 77.875, its highest since late February.

The euro edged back towards a seven-month low of $1.3495 plumbed last week, coming off an overnight peak at $1.3800 to trade at $1.3581 with bears targeting stop-loss orders lurking around $1.3500.

The euro also hit a 10-year trough versus the yen — another benefactor of dampened risk sentiment — at 103.67 , while the Australian dollar moved down towards parity with its U.S. cousin to last trade at 1.0057 — its lowest since Aug. 9.

“To be honest, I’m surprised to see so much risk aversion after the Fed. I didn’t think that many people had expected the Fed to expand its balance sheet, but it seems like some had been wishing for a bolder easing move,” said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

SHOUTING DISTANCE

“With this event over, the market focus shifts now squarely back to the euro zone and the next economic indicators. We all have to wait to see if Greece gets another tranche of bailout money,” Ino said.

The Fed sounded downbeat on the state of the economy and said economic growth remained slow, with recent indicators pointing to continuing weakness in overall labour market conditions and the unemployment rate remaining elevated.

On Wednesday, Greece outlined key measures to help alleviate the country’s fiscal problems.

It adopted further austerity measures to secure a bailout instalment crucial to avoid running out of money next month, as the International Monetary Fund warned that Europe’s sovereign debt crisis risks tearing a giant hole in banks’ capital.

The yen was stuck at 76.59 to the dollar, after climbing within shouting distance of its record high against the dollar of 75.94 the previous day, although traders said more dollar selling from Tokyo exporters could soon spur a yen spike to new all-time highs.

Against the Swiss franc, the dollar held steady around 0.9000 francs after jumping 1.5 percent overnight, pushed up by the euro which muscled in on the Swissie on talk that the Swiss National Bank may lift its euro/Swiss target to 1.25 from 1.20. The SNB declined comment.

The euro last traded steady at 1.2224 francs .

Investors dumped a whole range of so-called risk currencies with the New Zealand dollar shedding 0.7 percent to $0.7980, off an $0.8241 peak hit the day before.

The kiwi was hurt by data showing New Zealand’s economy grew more slowly than expected in the June quarter, backing views that the central bank is likely to keep interest rates low for longer in the wake of global uncertainty.

With investors moving into the liquid U.S. dollar, and snapping up profits on growth-leveraged emerging currencies, the Brazilian real tumbled 2.6 percent to $1.8911 , marking its biggest daily loss in nearly three years.

Dealers fear regional Asian currencies will also take another beating as foreign investors take money home.

Data to come includes the HSBC China flash PMI.



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