Dollar gains as investors ponder size of Fed move

AP News
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Posted: Oct 26, 2010 4:09 PM
Dollar gains as investors ponder size of Fed move

The dollar turned higher Tuesday as investors pondered how much to expect from the Federal Reserve next week when it's due to decide on economic stimulus measures.

The dollar has declined sharply over the past two months because investors expect Fed policymakers to announce more measures to boost the economy at its Nov. 2-3 meeting. Investors have been pricing in a huge program of bond-buying, which would drive interest rates lower and weigh on the dollar. A smaller, piecemeal approach by the Fed could offer some support for the dollar.

The dollar has fallen about 7 percent since late August, when Fed chief Ben Bernanke first hinted at the Fed's plans. On Oct. 15, the dollar fell to its weakest point against the euro since January, and struck its latest 15-year low against the yen on Monday.

Investors' certainty that the Fed will act in November may be starting to ebb, said Brian Dolan, chief currency strategist at Forex.com.

In a speech Monday night, William Dudley, the president of the Federal Reserve Bank of New York, said that further Fed action was "likely to be warranted" unless the economic outlook improved. Still, he added that the Fed "cannot wave a magic wand and make the problems remaining from the preceding period of excess vanish immediately."

Dudley's speech indicated that the Fed may be planning smaller monthly bond purchases of about $100 billion that can be abandoned if the economic outlook improves, rather than a set program of trillions of dollars over a specific timeframe, said David Watt, senior currency strategist at RBC Capital in Toronto.

In a research note, Bank of America Merrill Lynch analyst David Woo said that "Anything short of ($500 billion) in announced purchases over a six-month horizon could actually disappoint the market."

In late trading in New York, the euro slumped to $1.3850 from $1.3976, while the dollar rose to 81.49 Japanese yen from 80.85 yen. The British pound rose to $1.5835 from $1.5748.

The dollar gained to 1.0246 Canadian dollars from 1.0186 Canadian dollars, and moved up to 0.9861 Swiss francs from 0.9707 Swiss francs.