Dollar Drops to Lowest Since January Versus Euro on Fed Easing, Yen Falls

The dollar touched a nine-month low versus the euro after the Federal Reserve said it will pump more money into the economy by boosting asset purchases to spur inflation and employment, debasing the world’s reserve currency.

The greenback swung between gains and losses as the Fed said it will buy $600 billion under quantitative easing, fueling speculation about responses by other central banks. The European Central Bank and Bank of England are scheduled to meet tomorrow, and the Bank of Japan meets Nov. 5.

“Quantitative easing is by its nature corrosive to the value of the currency,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “The larger the quantitative easing measure, the worse it is for the dollar.”

The dollar was little changed at $1.4026 per euro at 2:32 p.m. in New York, from $1.4034 yesterday. It touched $1.4179, matching a low reached Jan. 26. The dollar rose 1 percent to 81.48 yen, from 80.63. The Japanese currency dropped against all major currencies on speculation the Fed’s plan will increase demand for higher yielding assets.

The Fed plans to buy Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. Policy makers, who said new purchases will be about $75 billion a month, “will adjust the program as needed to best foster maximum employment and price stability,” the Fed’s Open Market Committee said in a statement in Washington. The central bank kept its pledge to keep interest rates low for an “extended period.”

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, had declined 1.4 percent this year before the Fed’s statement. It has fallen 13 percent since reaching a 2010 high of 88.708 on June 7.

The yen has gained even after Japan’s effort to curb its advance on Sept. 15, when the Finance Ministry acknowledged intervening in the market by selling the currency.

Economists’ forecasts for the size of the purchase ranged from $500 billion to $2 trillion.

A cheaper dollar would boost U.S. growth by helping American exports, while strengthening currencies abroad and threatening European and Japanese expansion. Group of 20 finance ministers and central bankers pledged last month to avoid “competitive devaluation of currencies.”

Fed Funds

The Fed has held the benchmark interest rate at a record- low range of zero to 0.25 percent since December 2008 to spur the economy. It bought $1.75 trillion of securities in its first round of quantitative easing, which ended in March, to help bring down interest rates on mortgages and consumer loans. The purchases included mortgage-backed securities and $300 billion in Treasuries.

Rates for 30-year mortgages fell from 6.46 percent in October 2008 to 4.71 percent in December 2009 and a record low 4.19 percent last month. Even so, new home sales are hovering near the all-time low annual rate of 282,00, reached in May.

The dollar has fallen 9 percent versus the euro since Aug. 27, when Fed Chairman Ben S. Bernanke said in a speech in Jackson Hole, Wyoming, the central bank would “do all that it can” to sustain the recovery.

‘On the Back Foot’

“The quantitative easing story got credible in the wake of Bernanke’s speech at Jackson Hole,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “Ever since, the dollar has been on the back foot, it has been hit across the board.”

Bernanke added in a speech in Boston on Oct. 15 that additional monetary stimulus might be warranted because inflation is too low and unemployment too high. The jobless rate has been 9.5 percent or higher for 14 straight months. The central bank’s preferred price measure, which excludes food and fuel, was unchanged in September from the prior month and was up 1.2 percent from a year earlier, the smallest gain since September 2001. The Fed has a mandate to promote maximum employment and price stability.

The Fed also began a program in August to reinvest principal payments on its mortgage holdings into long-term government debt to keep money from being drained out of the financial system. It has bought $64.82 billion.

Economists in a Bloomberg News survey forecast the Fed would announce a plan to purchase at least $500 billion of long- term securities in a program called quantitative easing. Fifty- three of 56 said policy makers would begin a new round of unconventional easing. Twenty-nine forecast a pledge to buy $500 billion or more, while another seven predicted $50 billion to $100 billion in monthly purchases without a specified total.

Other estimates for the size of renewed asset-purchases ranged from $1 trillion at Bank of America-Merrill Lynch to $2 trillion at Goldman Sachs Group Inc.