Dollar drops after minutes hint at Fed action

AP News
Posted: Oct 12, 2010 3:42 PM
Dollar drops after minutes hint at Fed action

The dollar dropped sharply Tuesday afternoon after the release of minutes from the Federal Reserve's September meeting raised expectations that policymakers were close to enacting a new plan to support the economy.

Investors have been selling the dollar broadly since the Fed's Sept. 21 meeting. Many expect that the central bank will announce a big bond-buying program as soon as its Nov. 2-3 meeting. Such a move could drive record-low interest rates even lower. Lower rates might help pump up the economy, but they tend to weaken the dollar's appeal for investors.

"As far as we're concerned, it's a done deal," said Ron Leven, currency strategist at Morgan Stanley in New York. He said how the Fed is planning to put such a program to buy bonds in motion is still unclear. All the unknown variables will likely continue to weigh on the dollar, he said.

The euro charged to $1.3914 Tuesday after sinking as low as $1.3774 earlier in the day. Late Monday, it was worth $1.3891. The common currency had climbed 10 percent since August through last Friday, hitting its highest point since February at $1.4028 on Thursday.

The minutes released by the Fed Tuesday suggested that the central bank is close to consensus on offering more relief for the economy soon. The policymakers "seemed to lower the bar for further action" to support the economy, said Brown Brothers Harriman analyst Win Thin.

"Many participants" said that if economic growth "remained too slow," moving to drive rates lower would be appropriate, according to the minutes. Others thought more action would be necessary only if the economic outlook got worse than it is now.

The euro has been a big beneficiary of expectations that Fed moves will weaken the dollar, because the ECB is considered the major central bank most unlikely to offer further support to the economy. But the British pound remained lower Tuesday afternoon, dropping to $1.5778 in late trading from $1.5886. The dollar fell to 81.88 yen Japanese yen from 82.07 yen, hovering just above a 15-year low.

The ascent of the yen against the dollar in September prompted Japan to intervene in foreign exchange markets to weaken the yen in an effort to help its exporters. The dollar has resumed dropping against the yen since then.

More support for the economy from the Fed, which would likely weaken the dollar, comes even as the sliding dollar has driven central banks of other countries to weaken their own currencies.

Brazil and Thailand have also acted to slow the rise of their currencies in the past few weeks.

In other trading Tuesday, the dollar dipped to 1.0109 Canadian dollars from 1.0133 Canadian dollars, and dropped to 0.9578 Swiss francs from 0.9637 Swiss francs.