FOREX-Dollar near 3-week low as it falls prey to dovish Fed

by on April 26, 2012 3:16 am GMT

Wed Apr 25, 2012 11:16pm EDT

* Dollar struggles at 3-week lows vs basket of currencies

* Euro tackles major retracement levels

* Yen keeps eye on BOJ policy meeting on Friday

* NZD undermined after RBNZ’s attempt to talk down currency

By Hideyuki Sano

TOKYO, April 26 (Reuters) – The U.S. dollar floundered at
three-week lows against a basket of major currencies on
Thursday, after the Federal Reserve did little to alter the
perception that the central bank will be deeply committed to a
dovish policy stance.

While the Fed’s policy meeting turned out to be a bit of an
anti-climax to many market players, the fall in euro zone
sovereign yield spreads overnight also helped to push the euro
up above its peak last week to test major resistance levels.

The dollar index stood at 79.063, having fallen as
low as 78.995 after Fed Chairman Ben Bernanke said the central
bank would not hesitate to launch another round of bond buying
if the economy needed it.

The Fed has previously engaged in two rounds of asset
purchases totaling $2.3 trillion, known as quantitative easing,
to drive down interest rates and stimulate the economy.

“Despite its projections that GDP growth will pick up, the
FOMC expects unemployment to remain well above target by the end
of 2014. This means that there is scope for further monetary
easing down the road, especially if the recovery falters,” said
Philip Marey, strategist at Rabobank.

Fresh projections released by the Fed also showed support
for a rate hike before 2014 among policymakers did not increase
from January, disappointing dollar bulls who had hoped that the
projections could trigger expectations of an earlier exit from
easy policy.

This saw the euro hit a three-week high of $1.3234,
near major resistance around $1.3240, which is a 50 percent
retracement of its decline from late Feb to Apr. 16 and a 61.8
percent of its decline from the March 27 peak to the same low.

A break of that level could bring into focus a band of
resistance at $1.3370/90 seen in late March and early April. It
last stood at $1.3227.

Debt yields of Spain and France eased sharply from recent
highs on Wednesday, although Italian debt had less luck due to
caution ahead of a debt auction by Italy on Friday.

The dollar fetched 81.23 yen, down slightly from last
U.S. levels, but stayed in a 80.30/81.80 range seen in the past
few sessions ahead of the BOJ’s policy meeting on Friday.

The Japanese currency is unlikely to make much headway ahead
of the meeting. Sources familiar with the central bank’s
thinking, said the BOJ is likely to ease monetary policy on
Friday by boosting asset purchases by up to 10 trillion yen
($123 billion).

Meanwhile, the New Zealand dollar slipped 0.2 percent to
$0.8144, after RBNZ Governor Alan Bollard said the
local dollar was still high despite recent falls in commodity
prices, and warned that would influence future policy.

Earlier it had popped to a high of $0.8176 as the markets
covered short positions after the Reserve Bank of New Zealand
kept rates unchanged at a record low 2.5 percent as expected.

Rate markets were now pricing in a one-in-five chance of a
cut at the next RBNZ meeting and 7 basis points of easing over
the next 12 months.

The Australian dollar was spared much of the drama, holding
at $1.0361. It has risen in the past two sessions from
a low of $1.0247, hit after tame inflation data cleared the way
for a rate cut next week.