Wednesday, March 18, 2009

Dollar hit, Asian stocks rally on Fed move

Hongkong (Reuters) - The U.S. dollar nursed big losses on Thursday and Asian government bonds rallied after the Federal Reserve vowed to buy long dated U.S. Treasuries, reviving a practice not used in decades to revive an ailing economy.The Fed surprised investors on Wednesday by announcing it would buy $300 billion worth of these U.S. Treasuries for the first time since the early 1960s as part of a move to inject an additional $1 trillion into the U.S. economy by also purchasing more U.S. mortgage and agency debt.

The move sent Asian stocks a five-week high, as bank shares helped extend a recent rally, and on broader investor optimism that a stronger U.S. economy will help the continent's export-dependent economies.But analysts were also warning of the risks to the Fed's quantitative easing. Gold fell on profit-taking after surging the previous session on concerns about the potential inflationary effects from the Fed's efforts, even if the near-term concern is deflation.

The move to expand the Fed's balance sheet is also sparking doubts about the dollar's status as the world's reserve currency, and concerns that it will be followed by similar moves from other central banks, creating a domino effect of weakening currencies.Central banks in Britain and Japan have already announced they would purchase their respective government debt, while the Swiss National Bank last week said outright it would sell francs to weaken its currency.

"With the Fed now effectively undermining the dollar, the worry is that central banks are playing competitive devaluations," said Tony Morriss, senior rates strategist at ANZ. "The Fed won't say it outright, but they would likely welcome a weaker currency."The announcement following a policy meeting that kept U.S. interest rates at nearly zero effectively seeks to print money to revive an economy in a practice known as quantitative easing.

The move to purchase longer-dated U.S. government debt, on top of regular purchases of short-term Treasury bills, is intended to feed into the U.S. economy via a lower array of credit costs for consumers and businesses.The euro climbed as high as $1.3536 against the dollar on trading platform EBS, marking the highest since early January, but later shed its gains and was down 0.2 percent at $1.3444 from late U.S. trading on Wednesday

That followed the euro's 3.9 percent jump against the dollar on Wednesday according to Reuters data, its biggest one-day percentage gain since the launch of the single currency in 1999.The dollar initially dipped against the yen, but later rebounded, rising 0.2 percent to 96.40 yen after dropping nearly 3 percent against the Japanese currency on Wednesday.

"The dollar was taken to the woodshed and beaten like a dog," said David Watt, senior currency strategist at RBC Capital Markets. "And after a short rest, beaten like a dog again. Market sentiment on the Fed's maneuver was crystal clear."In bond markets, U.S. Treasury yields remained sharply lower in Asia on Thursday, after plunging in the previous session by the most since the day after the U.S. stock market crash in 1987.

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