FOREX-U.S. dollar rallies broadly after Fed minutes

Wed Feb 20, 2013 3:54pm EST
 
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* Fed may need to taper, halt QE3 - minutes
    * Japan PM Abe backtracks on foreign bond buying
    * Sterling drops sharply after dovish BoE minutes

    By Wanfeng Zhou
    NEW YORK, Feb 20 (Reuters) - The dollar jumped to a
four-week high against the euro and rose versus the yen on
Wednesday after minutes from the Federal Reserve's last meeting
suggested policymakers may have to slow or stop buying assets
before seeing the pick-up in hiring.
    The Australian, Canadian and New Zealand dollars fell as
weakness in stocks and commodities prompted investors to dump
riskier assets. Sterling tumbled on speculation of further
monetary easing by the Bank of England.
    Policymakers are increasingly worried about the costs and
risks of their quantitative-easing program, the Fed minutes
showed, fueling expectations the central bank may scale back its
stimulus program sooner rather than later. 
    "The dollar has been generally firm all day and the (Fed) 
minutes have been seized as a handy reason to extend those
gains," said Marc Chandler, global head of currency strategy at
Brown Brothers Harriman.
    The U.S. currency had been rising even before the Fed
minutes as weakness in equities and commodities and speculation
of a hedge fund selling assets spurred investors to seek safe
havens.
    "We are seeing generally a risk-off sentiment," said Ravi
Bharadwaj, market analyst at Western Union Business Solutions in
Washington.
    The dollar index, which tracks the greenback versus a basket
of six currencies, rose 0.8 percent to 81.078. It had hit
as high as 81.116, the strongest since late November.
    Although the minutes said that many officials voiced concern
last month over potential costs of further asset purchases, that
hawkish tone was balanced somewhat by a warning about the
dangers of ending the bond-buying program prematurely.
    The Fed voted last month to maintain its third round of
so-called quantitative easing, or QE3, at an $85 billion monthly
pace, and said it would buy bonds until it saw a substantial
improvement in the outlook for the labor market, which remains
under pressure with the jobless rate at 7.9 percent. 
    Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New
York, said the minutes will do nothing to detract from
expectations of a tapering off of quantitative easing in the
second half of the year.
    "That will be treated like the beginning of the end of
highly accommodative policy, and therefore akin to a tightening,
even if the Fed's balance sheet is still expanding," he wrote to
clients. That should result in a stronger dollar in the second
half of the year, he said.
    The euro fell 0.8 percent to $1.3278, having dropped
as low as $1.3273 on Reuters data, the lowest since Jan. 23. It
slipped 0.7 percent to 124.41 yen.
    Against the yen, the dollar rose 0.2 percent to 93.69 yen
 as U.S. bond yields rose.
    The yen had gained the previous day after disagreements
between Japanese officials on foreign bond purchases raised
doubts over how aggressively Japan will ease its monetary
policy.
    Japanese Finance Minister Taro Aso said on Tuesday he was
not considering buying foreign bonds as part of efforts to ease
monetary policy, even though Prime Minister Shinzo Abe said this
was an option. 
    But Abe mirrored Aso's stance on Wednesday, saying the need
to establish a public-private sector fund to buy foreign bonds
has diminished. 
    Sterling fell to its lowest since July, 2010 versus the
dollar and was last down 1.2 percent at $1.5238 after
minutes from the Bank of England's latest meeting showed the
central bank appeared closer than expected to loosening monetary
policy.
    "The BoE have moved the goal posts. They are now saying that
despite higher inflation they are thinking of doing more QE, so
it is clear sterling has to weaken," said Hans Redeker, head of
Global FX strategy at Morgan Stanley.
    The Australian dollar lost 1 percent to $1.0246,
while the New Zealand dollar lost 1.5 percent to $0.8339.
    Reserve Bank of New Zealand Governor Graeme Wheeler said
global imbalances and a weak U.S. dollar were driving up the New
Zealand dollar and left the currency overvalued compared with
economic fundamentals.