The Euro may reach $1.40 as the Fed buys government debt

The euro may surge to $1.40 for the first time in 11 weeks on theEuropean Central Bank’s reluctance to match the Federal Reserve inbuying government debt, before falling toward $1.20 later this year,UBS AG said. The euro rose yesterday the most against the U.S. dollarin almost nine years and the Standard & Poor’s 500 index jumped toa one-month high after the Fed said it will purchase $300 billion oflonger-term Treasuries. “Expect the euro to keep overshooting for nowwith euro- dollar back toward $1.40,” Mohi-Uddin wrote. “The return ofinvestor risk aversion and all the major central banks embracingquantitative easing will cause safe haven seeking flows to resume andpush the U.S. dollar higher back toward its long-term fair value of$1.20 this year.” The EUR/USD is currently trading at $1.3475 as of8:40am, GMT.

The rally that pushed the dollar to the highest levels since 2006 is indanger of crumbling as the Federal Reserve starts buying Treasuries andramps up its purchases of mortgage debt, adding to a flood ofgreenbacks. “The implications of today’s Fed decision are unambiguous,”currency strategists at Citigroup Inc. wrote in a research reportwithin a half hour of the Fed’s decision yesterday. The dollar “shouldweaken,” they said. Fed policy makers said yesterday they plan to buyas much as $300 billion of U.S. government bonds and step up purchasesof mortgage bonds, expanding the central bank’s balance sheet by asmuch as $1.15 trillion. The extra supply of dollars threatens tooverwhelm investors just as the budget deficit swells.

The Australian dollar fell and its bonds rose as investors speculatedthe central bank will lower interest rates because of the slowingglobal economy. Interest rates are 3.25 percent in Australia and 3percent in New Zealand, compared with 0.1 percent in Japan and as lowas zero in the U.S., prompting investors to purchase the South Pacificnations’ assets with money borrowed in the U.S. or Japan. The risk insuch so-called carry trades is that exchange-rate moves can eraseprofits. “In this environment, it’s not going to be possible forAustralia to avoid some further weakness,” RBA Assistant GovernorMalcolm Edey said today in Sydney. Australia has “more scope than mostfor macroeconomic policies to respond as needed,” he said. AUD/USD iscurrently trading at 0.6775 as of 9:05am, GMT.

Today's Economic Events