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Euro strengthens against weak Dollar

Friday, September 14 07:27:33

The dollar hit a four-month low against a basket of major currencies today, extending losses after the U.S. Federal Reserve announced a new round of aggressive monetary stimulus to support economic growth. The euro hit a four-month high and commodity currencies such as the Australian dollar rallied in the wake of the Fed action.

Traders said the euro could add to its gains in the near term, although a sharp rise seemed unlikely. "I don't get the sense that it will keep on going. A slight break above $1.30 might be all that it can manage," said Akira Hoshino, chief manager at Bank of Tokyo-Mitsubishi UFJ's foreign exchange trading department in Tokyo, referring to the euro.

The single currency climbed to as high as $1.3046 on trading platform EBS, its highest level in four months. The euro last stood at $1.3041, up 0.4 percent from late U.S. trade on Thursday. While the risks of an extreme crisis in the euro zone seem to have receded for now, a continued rise in the euro could be negative for the euro zone's economy and that is one reason to be cautious about the single currency's outlook, said Hoshino at Bank of Tokyo-Mitsubishi UFJ.

"With backstops in place, the chances of scenarios such as a breakup of the euro or a Greek exit seem to have declined to some extent," he said. "But at the same time, persistent euro strength is something that would be negative for Europe," Hoshino said, adding that European officials may not be too happy about the euro's recent sharp rise. Market expectations that the European Central Bank's bond buying scheme will help reduce the borrowing costs of Spain and Italy have helped to support the euro, which has climbed roughly 8 percent from a two-year low of $1.2042 hit in late July. Underscoring the dollar's broad retreat, the dollar index, which measures the dollar's value against a basket of currencies, hit a four-month low of 78.989.

In fresh efforts to stimulate growth, the Fed said on Thursday it would buy $40 billion of mortgage-backed debt per month until the outlook for jobs improved substantially. It also expects interest rates to stay near zero until at least mid-2015. "We see the announcement as positive for market risk appetite and negative for the USD," Barclays Capital analysts said in a research note. Indeed, the Australian dollar powered to a one-month high of $1.0588. The New Zealand dollar hit a six-month high of $0.8354.

The Fed's bold action also put Japan in a bind by lifting the yen to levels that threaten already sluggish exports. The dollar edged up 0.1 percent to 77.58 yen yen, but still remained near a seven-month low of 77.13 yen hit on Thursday. The drop in the dollar has the market jittery about the potential for yen-selling intervention, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore. "On the face of it, you would expect the dollar to be sold (versus the yen). But if I were a dealer, I don't think I would be able to sell from here," Okagawa said. Adding to the anxiety, traders said the Bank of Japan, which conducts currency intervention on behalf of Japan's finance ministry, had conducted a rate check on Thursday after the Fed's decision. ( C) Reuters