Dollar slides as Fed says it will buy bonds

The Associated Press
Wednesday, November 3, 2010; 4:02 PM

NEW YORK -- The dollar slid Wednesday, briefly touching a nine-month low against the euro, after the Federal Reserve said it would spend $600 billion through the middle of next year to buy U.S. government bonds in an effort to boost the economy.

Investors had expected the Fed's action for months, ever since Ben Bernanke, the central bank's head, hinted at the move in a speech in late August. The dollar has been under heavy selling pressure since then. It has dropped more than 7 percent against a group of six major currencies.

It might seem confusing that an effort to boost the economy would hurt the dollar, since a strong currency is traditionally seen as a sign of economic health. The Fed's effort is aimed at lowering interest rates by buying government debt. That can encourage people to borrow and spend, but it also makes a currency less attractive for investors. Keeping interest rates too low for too long can also trigger inflation down the road, which erodes a currency's value.

A lower currency isn't necessarily all bad for the U.S. A weaker dollar can help boost U.S. exports, supporting the manufacturing sector and increasing economic growth.

In late trading in New York, the euro rose to $1.4103 from $1.4036 late Tuesday, while the British pound climbed to $1.6107 from $1.6024. The dollar held onto most earlier gains against the Japanese currency, however, rising to 81.29 yen from 80.68 yen late Tuesday.

The euro surged as high as $1.4175, its strongest point since late January. The yen remains not far off from 79.75 against the dollar, its lowest point since World War II, struck in April 1995.

Michael Woolfolk, senior currency strategist at Bank of New York Mellon Corp., said the dollar could be headed toward $1.50 against the euro "unless the Fed decides to pull back from what they've already announced."

Woolfolk also projects a break below 80 yen and more declines against currencies of fast-growing developing economies. On Wednesday, the dollar slid against the Brazilian real, Thai baht and South Korean won. Brazil and Thailand, as well as Japan, have recently moved to try to contain the gains in their currencies.

In other late trading, the dollar fell to 1.0059 Canadian dollars from 1.0090 Canadian dollars, and dipped to 0.9730 Swiss francs from 0.9794 Swiss francs.

The Australian dollar also became worth more than one U.S. dollar for only the third time ever since it became a freely traded currency in 1983. It touched its strongest point against the U.S. dollar since then, at $1.0035, on Wednesday.

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