CURRENCIES: Dollar Sinks As Investors Bet Fed Will Hold Rates

By Deborah Levine

The dollar sustained its losses against most major currencies Wednesday as investors, betting the Federal Reserve would keep rates near 0%, bought up higher-yielding currencies and equities.

An announcement from the Federal Open Market Committee with the central bank's outlook for rates and the economy is expected at 2:15 p.m. Eastern time.

"Risk on is the general theme running through foreign-exchange markets," said strategists at RBC Capital Markets.

The dollar index (DXY), which tracks the U.S. unit against a trade-weighted basket of other currencies, fell to 75.864 from 76.369 in North American trading late Tuesday.

The euro rose to $1.4844 from $1.4712. The European Central Bank is slated to gives its latest policy update on Thursday. The ECB is expected to keep rates at 1%.

The British pound made a gain of 0.9% on the day.

However, the dollar pushed higher against the Japanese yen, fetching 90.90 yen, up from 90.34 yen on Tuesday. The yen is usually the biggest loser when investors want to move toward riskier holdings.

U.S. benchmark stock indexes added to early gains, weighing on the dollar, after the Institute for Supply Management's index on the nonmanufacturing sector unexpectedly fell to 50.6 in October, off from a reading of 50.9 in September.

Analysts surveyed by MarketWatch had expected a rise to 51.5. Readings above 50 indicate expansion.

The Standard & Poor's 500 Index (SPX) rose 1% to 9,878.

Some of the details in the ISM report confirm "that the recovery in economic activity that was evident in the third-quarter GDP report was maintained into the start of the fourth quarter," said economists at RDQ Economics.

Earlier, the dollar had remained under pressure after ADP Employment Services said private employers cut 203,000 jobs in October, after a revised 227,000 in September that was fewer than initially reported.

FOMC speculation

The overwhelming consensus is that the Fed will hold the federal-funds rate steady near-zero, where the target has been since last December. Investors will be paying close attention, however, to the wording of the Fed's statement for any clue as to when the central bank would begin pushing interest rates higher.

Reports a couple weeks ago suggesting the FOMC could change the phrasing of the statement away from its previous pledge to maintain "exceptionally low" interest rates for an "extended period" have faded, as U.S. economic data have turned more mixed.

"It seems that on balance the Fed is still concerned about the fragility of the financial system and without more compelling evidence that inflation expectations are increasing, officials believe they can afford to be patient," said currency strategists at Brown Brothers Harriman.

"We expect no substantial change in this guidance," they told clients. "If there is, it would likely spur another round of dollar short-covering and could weigh on U.S. asset prices."

Since March, the Fed has said it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal-funds rate for an extended period."

In January, it had said "for some time" instead of "extended period."

"A shift back to their initial wording of holding short rates low for 'some time' is a prime alternative," said Steven Ricchiuto, chief economist at Mizuho Securities.

"The probability of such a move is only about 30%," he added.

"For the FOMC, the possibility of a double dip has to be taken seriously," Ricchiuto said.

In addition, what he called "the accumulating deflationary pressures" would make such a change premature.

The Fed may also refer to the success of its recently completed Treasury debt-purchase program, though few expect any changes to its ongoing mortgage-related debt-buying plan. Both fall into the category of quantitative easing, which tends to weigh on a country's currency.

British data lift sterling

The pound gained on both the dollar and the euro, playing off a survey of purchasing managers that indicated the U.K.'s dominant services sector saw activity rise at its fastest pace in more than two years.

The Bank of England also meets on Thursday and is expected to increase the amount of debt it will buy from the market.

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November 04, 2009 13:49 ET (18:49 GMT)


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