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Dollar falls, euro gains after ECB moves

Friday, September 14 16:52:53

The dollar dropped against most currencies today, hitting a more than four-month low versus the euro a day after the Federal Reserve announced a fresh round of monetary stimulus to boost a still lacklustre U.S. economy.

The Fed on Wednesday said it would embark on another phase of quantitative easing, by buying $40 billion of mortgage-backed debt per month until the outlook for U.S. jobs improved substantially. It also expects benchmark U.S. interest rates to stay near zero until at least mid-2015. In the Fed's previous two rounds of QE, it bought about $2.3 trillion in bonds to lower long-term rates. While lower rates may prompt more U.S. business and residential investments, they are viewed as negative for the dollar as there is less incentive for foreigners to buy what could be lower-yielding U.S. debt.

Some market players said the Fed's announcement and the European Central Bank's plan agreed last week to lower peripheral euro zone economies' borrowing costs could see the euro extend its rally toward $1.35 in the near term.

"The Fed's decision and the ECB's action together are decisive and consequential and should underwrite risk appetite well into next year." said Richard Franulovich, senior currency strategist at Westpac Securities in New York.

Commodity currencies including the Australian and Canadian dollars also rallied against the greenback, pushing the dollar index to 78.601, its lowest in more than four months.

The index was last at 78.702, down 0.7 percent.

The dollar, however, gained against the yen, which fell broadly on speculation Japanese authorities could intervene to cap its recent gains against the dollar. Expectations that the Bank of Japan could ease policy next week in response to the Fed's action will also likely undermine the yen, traders said.

The dollar rose more than 1.0 percent against the yen to 78.30 yen. It had hit a seven-month low of 77.11 yen on Thursday.

The euro hit a peak of $1.3168, its strongest level since early May. It was last at $1.3148, up 1.2 percent, as a drop in bond yields in smaller euro zone economies prompted investors to buy the currency. The euro zone single currency rose 2.6 percent this week, its best weekly performance since late January. (C ) Reuters