Dollar skids as Fed greenlights carry trade

By Ian Chua

SYDNEY (BestGrowthStock) – The U.S. dollar was on the run in early Asia on Thursday, while the Australian currency climbed to a 28-year high after the Federal Reserve launched a controversial policy to buy more government debt.

The Fed said it would buy $600 billion more in Treasuries by the middle of next year in an attempt to reinvigorate a flagging recovery, slightly more than the $500 billion markets were generally positioned for.

The euro, which hit 10-month highs at $1.4200 on EBS overnight, was last at $1.4133, up from around $1.4000 before the Fed announcement. Sterling hit a peak around $1.6180, highs last seen in late January, before easing back to retreated to $1.6100.

“Setting aside the immediate reaction in the FX market, we expect that this will ultimately prove to be bearish for the USD against other currencies and against a broad basket of commodities,” said analysts at JPMorgan in a note to clients.

Analysts expect investors to take the Fed’s commitment to open-ended purchases of Treasuries as a green light to use the dollar as a funding vehicle for carry trades into commodities, emerging markets and higher-yielding currencies.

Against the Japanese currency, the dollar last traded at 81.14 yen, off the overnight high of 81.59 on EBS.

The all-time low of 79.95 yen was still in focus and traders remained on alert for possible yen-selling intervention by Japanese authorities to weaken its currency.

The Bank of Japan meets on November 4-5, having brought forward its policy review from mid-November to speed up the launch of its 5-trillion yen ($62 billion) asset buying scheme.

“We may be in for a period of consolidation. We’ve got the ECB and Bank of England meetings tonight, so we’ll see how those pan out. In the more medium term, for the dollar to regain a stronger tone, you’ll need to see the jobs data,” said Grant Turley, strategist at ANZ in Sydney.

The European Central Bank is not expected to show any signs of veering off its crisis exit path, but there is an outside chance of more quantitative easing from the Bank of England.

On Friday, the influential non-farm payrolls data is expected to show the U.S. economy generated 60,000 jobs in October.

The Fed announcement came after the widely expected outcome of U.S. midterm elections — where the Republicans took control of the House of Representatives while the Democrats were set to hang on to the Senate.

The dollar has lost nearly 8.0 percent versus a basket of major currencies (.DXY: ) since September on expectations that more monetary easing from the Fed would pressure U.S. yields and diminish the return on dollar-denominated assets.

Medium-term U.S. Treasury debt yields fell on views they would benefit most from the Fed bond purchase program, while 30-year yields jumped in a sharp steepening of the curve.

The Australian dollar was one of the main beneficiaries of renewed dollar weakness, hitting a post-float high of $1.0064. It was last at $1.0056.

“We still favor those (like the Canadian, Australian and New Zealand dollars) where upward pressure on interest rates will increase as downside global economic risks abate,” said Kit Juckes, strategist at Societe Generale.

(Additional reporting by Wanfeng Zhou in NEW YORK)

Dollar skids as Fed greenlights carry trade