Dollar Index Declines to Eight-Month Low on Fed Rate Outlook

September 29, 2010, 7:32 AM EDT By Lukanyo Mnyanda and Yoshiaki Nohara

Sept. 29 (Bloomberg) -- The dollar fell to an eight-month low against a basket of currencies including the euro and yen on speculation the Federal Reserve will increase purchases of government debt to spur the economy.

The U.S. currency was headed for a quarterly loss versus all of its 16 most-traded counterparts as reports indicated the U.S. recovery is stalling. Sweden’s krona gained as consumer confidence in the Nordic nation unexpectedly rose. The franc fell to its weakest in more than a week against the euro after Switzerland’s leading economic indicators declined.

“We’re seeing continued dollar weakness on the back of weak data fueling expectations of quantitative easing,” said Niels Christensen, a currency strategist at Nordea Bank AB in Copenhagen. “In the current environment, it’s hard to see what will stop the downward trend in the dollar.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major counterparts, dropped 0.2 percent to 78.828 at 7:24 a.m. in New York, from 79.014 yesterday. It touched 78.616, the lowest level since Jan. 28.

The Conference Board’s index of U.S. confidence declined in September to 48.5, the lowest level since February, the New York-based research group reported yesterday. The median forecast of 75 economists in a Bloomberg News survey was for a drop to 52.1.

Fed’s Stance

The Fed announced following its Sept. 21 meeting that it’s prepared to do more to help the economy, spurring speculation policy makers will add securities to the central bank’s holdings by increasing their Treasury purchases under a policy known as quantitative easing.

The central bank retained last week its stance from its Aug. 10 meeting of keeping its portfolio of securities stable at about $2 trillion to keep money from draining out of the financial system. The Fed bought $550 million of Treasury Inflation Protected Securities yesterday, increasing the total amount of U.S. debt purchased since Aug. 17 to $34.612 billion.

Atlanta Fed President Dennis Lockhart said yesterday in text of a Sewanee, Tennessee, speech that the debate over a new round of asset purchases will “intensify” soon.

The dollar declined 0.1 percent to $1.3599 per euro, from $1.3585 yesterday, after touching $1.3639, the weakest level since April 15. The euro traded at 113.78 yen, compared with 113.94. The yen advanced 0.3 percent to 83.66 per dollar, from 83.87, after reaching 83.50, the strongest level since Japan intervened in the currency market on Sept. 15.

Dollar’s Drop

The U.S. currency has declined 10 percent versus the euro this quarter in the worst performance among the European currency’s 16 major counterparts. The greenback has pared this year’s advance to 5.2 percent.

The Ministry of Finance in Tokyo will report tomorrow the amount of yen the central bank sold from Aug. 28 through Sept. 28 to curb appreciation in the currency. Demand for the yen has been tempered amid speculation Japan will sell its currency again after doing so on Sept. 15 for the first time since 2004.

The yen rose against the euro and dollar as the Bank of Japan’s Tankan survey showed business confidence improved at a slower pace, fueling demand for Japan’s currency as a haven.

The BOJ’s quarterly index of sentiment at Japan’s large manufacturers rose by 7 points in September, the smallest improvement since March 2009. The yen remained stronger than the 89.44 per dollar average estimated by large manufacturers for the six months to March 2011 in the report.

Sweden’s Krona

Sweden’s krona appreciated 0.4 percent to 9.1515 per euro and advanced 0.6 percent to 6.7230 versus the dollar. It touched 9.0921 per euro on Sept. 22, the strongest since Oct. 15, 2007.

The Nordic nation’s consumer confidence index climbed to 28.4 in September, the most since August 2000, the National Institute of Economic Research in Stockholm said today. That median forecast of 11 economists was for a reading of 24.

The Swiss franc declined as much as 0.7 percent to 1.3349 against the euro, the weakest level since Sept. 17, before trading at 1.3294, compared with 1.3257 yesterday.

A monthly gauge that aims to predict the Swiss economy’s direction about six months ahead slipped to 2.21 from a revised 2.22 in August, the KOF research institute in Zurich said in an e-mailed statement today. The indicator rose to 2.24 in June, the highest level in almost four years.

The franc has declined 0.9 percent against the euro since the end of June. It lost 0.1 percent to 97.69 centimes against the dollar, after earlier climbing to a record of 97.34.

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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