Dollar dips as investors expect new Fed stimulus

NEW YORK: The dollar dipped against other major currencies Monday as investors bet the Federal Reserve would provide more stimulus to the lackluster US economy at its rate-setting meeting this week.

The euro was buying $1.2939 at 2200 GMT, up from $1.2928 at the same time Friday.

Against the Japanese currency, the European currency weakened to 106.53 yen from 106.64 yen late Friday, while the dollar edged down to 82.33 yen from 82.46 yen.

"We believe the weakness in the greenback reflects the market's expectations for easier monetary policy from the Fed," said Kathy Lien of BK Asset Management.

The US central bank's policy-setting Federal Open Market Committee opens a two-day meeting Tuesday. Stubborn high unemployment and the looming fiscal cliff challenge give the Fed every reason to expand its stimulus efforts, analysts said.

Gathering just before its "Twist" asset-swap operation expires at year-end, there are signs the FOMC will replace it with more outright bond purchases, or "quantitative easing," aimed at lowering interest rates to encourage businesses to invest and hire.

"Given the increasing uncertainty about America's looming fiscal crisis, the Fed is likely to signal that it will continue its outright purchases of mortgage and agency bonds worth $85 billion and maintain lending rates near zero until mid-2015," said Omer Esiner of Commonwealth Foreign Exchange.

"If the Fed signals that further easing next year is likely, the dollar could suffer."

Against the Swiss currency, the dollar fell to 0.9335 francs from 0.9343 francs late Friday.

The British pound fetched $1.6075, up from $1.6039.

Easing in the cards as Fed meets

WASHINGTON: The Federal Reserve's policy board is expected to embark on fresh monetary easing measures as it meets Wednesday and Thursday to address a weak US economy and stagnant job creation.

But just how far the Federal Open Market committee will go, and what kind of impact it can have, is unclear, analysts said.

After three years trying to get the economy humming following a deep recession, problems outside the Fed's hands, like recession in the eurozone and China's sharp slowdown, are damping its impact.

Also casting dark shadows are the tight presidential election battle and the political stalemate over debt and fiscal policy, which businesses cite as worrisome sources of instability.

Even so, with the newest data on the economy mostly discouraging, and Fed chairman Ben Bernanke strongly in favor of new action, the FOMC is likely to deliver some type of medicine aimed at pushing interest rates lower to encourage borrowing and investment.

That could come in the form of extending its forecast for the period it expects to keep its benchmark rate at the current near-zero level -- essentially a promise that it will not raise rates over the next three years or so.

Or it could come with a third "QE" quantitative easing bond buying program, which aims at lowering long-term rates.

"Recent public comments, as well as the minutes from the last Fed meeting, indicated that if the economy did not begin to meaningfully improve policymakers would be inclined to act more aggressively," said Joseph LaVorgna of Deutsche Bank.

"Last week's data was not encouraging in this regard... which is why we now anticipate quantitative easing measures."

Bernanke's baring of deep worries about the eight-percent-plus level of unemployment in an August 31 speech was the strongest signal so far of the likelihood of the Fed taking new action.

"Growth in recent quarters has been tepid, and so, not surprisingly, we have seen no net improvement in the unemployment rate since January," he said.

"The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years."

Bernanke's view earned support on Friday when national data for August showed a poor level of jobs created during the month -- only 96,000 -- and also that some 368,000 people gave up searching for jobs and left the labor force.

The dropout level, rather than a surge in people getting jobs, helped push the unemployment rate lower to a deceptive 8.1 percent.

More indicative was that the employment-to-population ratio fell to 58.3 percent, compared with 65 percent-plus before the 2008-2009 recession.

Such numbers shore up Bernanke's view within the 10-member FOMC, which has been divided over whether to take more action in recent months.

With critics saying the Fed's low interest rates are not turning into lending by banks or job-creating investments by companies, Bernanke gave a stiff defense of the two previous QE programs in his August 31 speech.

Such actions "may have raised the level of output by almost three percent and increased private payroll employment by more than two million jobs, relative to what otherwise would have occurred," he argued.

Still, there were doubts about how far the FOMC is ready to go this week, or whether they might just put off the decision until later in the year.

"Markets are seemingly positioned for QE3, yet the latest Fedspeak and recent macroeconomic data do not provide obvious support for additional easing," said economists at BBVA Research.

"The previous FOMC meeting minutes highlighted the intense internal policy debate among committee members, proving that there is still a significant divide in ideology."

John Ryding and Conrad DeQuadros at RDQ Economics said Fed action, whether launching QE3 or extending their commitment to zero-level interest rates into 2015, "will do little, if anything, to boost growth."

"There is no shortage of liquidity in the banking system with reserves at almost $1.5 trillion. There is, however, considerable uncertainty on the outlook for the taxation of labor and capital in 2013, which we think is the major challenge for the economy over the remainder of this year."

Fed sees weaker growth but holds off stimulus

WASHINGTON: The Federal Reserve downgraded its assessment of the US economy on Wednesday, saying growth had slowed, but shied away from launching a fresh round of economic stimulus.

"Economic activity decelerated somewhat over the first half of this year," the Fed said at the conclusion of a two-day top-level meeting as it left current monetary policy in place.

The interest rate-setting Federal Open Market Committee (FOMC) said it expected "economic growth to remain moderate over coming quarters and then to pick up very gradually."

"The unemployment rate will decline only slowly," it said.

The bank also downplayed glimmers of hope that the housing market is starting to rebound, saying: "Despite some further signs of improvement, the housing sector remains depressed."

But there was no new action to juice the economy.

Instead bank policymakers reiterated their pledge to leave interest rates close to zero until the end of 2014 and reaffirmed their readiness to act.

The decision not to pull the trigger on new measures puzzled some analysts and investors.

The Dow Jones Industrial Average fell sharply after the Fed statement was published. It ended the day down 0.3 percent and under the symbolic threshold of 13,000 points.

Ryan Sweet of Moody's Analytics described the Fed's decision not to provide more stimulus or extend the time-frame for low rates as "a bit of (a) surprise move."

"There was a strong case for changing the rate guidance," he said, adding that "the odds of the Fed launching a third round of quantitative easing in September are lower."

The Fed vowed to "provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability."

The Fed has kept interest rates at historic lows, between zero and 0.25 percent, since December 2008 and dished out liquidity in a bid to spur recovery from the Great Recession.

With few tools left in the box and the outlook murky, the Fed has been reluctant to embark on a third round of asset purchases, or quantitative easing, dubbed QE3.

Chairman Ben Bernanke and his colleagues have preferred to wait and see whether a recent slowdown has been a blip, or a harbinger of worse times ahead.

All eyes will now be on US jobs and unemployment data slated for release on Friday, which could make or break the chances of more stimulus when the Fed meets again in September.

"This is the first time in five years of near-constant easing that I can remember the FOMC doing less than I expected," said Stephen Stanley, chief economist at Pierpont Securities.

"Instead, the committee put themselves on a state of heightened alert."

"Clearly, the heightened alert language is meant to send the signal that the FOMC is prepared to do something significant in September unless things get better."

Once again Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, was the only dissenting voice. He voted against current policy, voicing concern about declaring a time period for low rates.

Fed sees sharp US budget cuts as "sizable risk"

WASHINGTON: The Federal Reserve sees a quick, sharp tightening of US spending as a "sizable risk" to the economy, minutes from a recent top-level policy meeting revealed Wednesday.

"Several" members of the Fed's interest rate-setting panel have expressed fears that uncertainty about dramatic budget cuts could curb business hiring and economic growth.

At the end of this year, if Congress does not act, automatic budget cuts will hack $1.2 billion off government spending at the same time that billions of dollars' worth of tax cuts expire.

Taken together, the measures aim to trim an estimated $6.8 trillion off the US deficit over a decade.

But they would also force a sudden contraction in government spending, crucial to the economy.

"If agreement is not reached on a plan for the federal budget, a sharp fiscal tightening could occur at the start of 2013," the minutes noted.

"Uncertainty about the trajectory of future fiscal policy could lead businesses to defer hiring and investment."

While Fed officials have previously spoken about the looming fiscal cliff, the minutes of the Federal Open Market Committee's April 24-25 meeting show the depth of that concern.

"It is clear from the minutes that some Fed officials have started to worry about the implications of the 'fiscal cliff,'" said Stephen Stanley, an economist with Pierpont Securities.

In April, Fed Chairman Ben Bernanke warned Congress that the central bank would not be able to act as a saviour for the economy if Congress failed to act.

"The size of the fiscal cliff is such that there is, I think, absolutely no chance that the Federal Reserve could or would have the ability whatsoever to offset that effect on the economy," he said.

Yet the subject remains highly contentious in Washington, which is mired in partisan sniping as the country rushes toward presidential elections in November.

The Republican speaker of the House of Representatives, John Boehner, has indicated he wants a showdown with President Barack Obama over the issue.

Last year the failure of America's political parties to reach a deal over budget issues resulted in a first-ever downgrade of the country's credit rating.

Meanwhile the Fed also warned that the incessant debt crisis in Europe could yet hit the United States.

"Strains in global financial markets stemming from the sovereign debt and banking situation in Europe continued to pose significant downside risks to economic activity both here and abroad," the minutes noted.

The minutes also showed some support for further stimulus if the US recovery slows sharply.

"The economy continued to expand moderately," participants noted. "Labor market conditions improved in recent months."

But most analysts saw the Fed standing pat.

"The committee, on balance, saw the incoming data as improving enough to alter its forecast in favor of stronger growth, lower unemployment, and higher inflation, but did not feel confident enough about the improvement to adjust its policy stance," said Michael Gapen of Barclays Capital.

There was also some skepticism that recent strong economic data could be the start of a rapid improvement in the world's largest economy.

Some members of the committee "thought it was premature to infer a stronger underlying trend from the recent positive indicators, since those readings may partially reflect the effects of the mild winter weather or other temporary influences."

Euro dives below US$1.37 on Greek referendum call

NEW YORK: The European single currency fell below $1.37 on Tuesday after debt-plagued Greece shocked investors by calling a referendum over the nation's latest EU bailout.

Adding to the toxic mix, indebted Italy's bonds came under acute pressure on heightened concern over spreading debt contagion from the eurozone crisis.

The euro tumbled as low as $1.3609, its lowest level since October 12, before recovering to $1.3697 at 2200 GMT, down from $1.3851 late Monday.

It was a big drop from the $1.42 level struck last Thursday, following the EU summit's reaching a comprehensive deal to resolve the months-long crisis in the euro zone, beginning with a new Greek debt reduction and austerity deal.

"This throws all the summit's deliberations up in the air, even though they were considered lame in the first place," said David Morrison of currency specialist FX360.

"In consequence, investors are rushing to reduce their risk exposure across the board and fleeing into the relative safety of the dollar and US Treasuries."

The euro fell to 107.29 Japanese yen, down from 108.28 yen, while the dollar rose to 78.34 yen from 78.16.

The dollar was almost unchanged at 0.8869 Swiss francs. The British pound fell to $1.5950 from $1.6073.

While the euro zone crisis will continue to drive markets - France and Germany have already called another emergency summit to deal with the Greek issue - traders will also be watching whatever comes out Wednesday from the meeting of the US Federal Reserve's policy board.

While few expect any overt policy decisions - interest rates should be kept at the ultra-low levels - some anticipate signals in the language the Fed uses to indicate the medium-term direction of monetary policy.

"The rally in the greenback and the sell-off in equities indicate that investors are focused on one thing and one thing only, which is the uncertainty in the global economy," said FX360's Kathy Lien.

"What this means is that if the Federal Reserve eases monetary policy because they have grown more pessimistic about the outlook for the US economy, it may not be as overwhelmingly negative for the dollar as most people would normally expect.

"It is perfectly feasible and probably likely that the dollar will rise against risk currencies if the Fed takes additional steps to ease monetary policy."