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Fed reduces bond buying amid growing economy

Andrea Wong, John Detrixhe

The dollar has gained after US Federal Reserve chairperson Ben Bernanke announced plans to taper monthly bond purchases.

Outgoing Federal Reserve chairperson, Ben Bernanke, announced plans for the central bank to begin to cut its monthly bond purchases. (AP)

The dollar rose after the Federal Reserve officials voted to reduce monthly asset purchases that are seen as debasing the US currency amid signs that economic growth is strengthening.

The US currency strengthened versus the yen after the central bank announced plans to cut its monthly bond purchases to $75-billion from $85-billion, taking its first step toward unwinding the unprecedented stimulus that chairperson Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s.

The Fed acted as a report showed housing starts last month reached a five-year high and the Labour Department reported on December 6 the unemployment rate declined to 7% in November, the lowest in five years.

"The dust still has to settle, but ultimately it’s positive for the dollar," Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a phone interview. "The fact the Fed did taper shows it’s confident about the pace of recovery, and the financial market can withstand modest reduction at this time."

The Bloomberg US Dollar Index, which monitors the greenback against 10 major counterparts, gained 0.1% to 1.016.69 at 2:59 pm in New York, after increasing as much as 0.4%. The greenback added 0.8% 103.50 yen, after reaching 103.92 on December 13, the highest level since October 2008.

The US currency advanced 0.1% to $1.3755 versus Europe’s 17-nation common currency after gaining as much as 0.5%.

Fed moves
"At the margin, people want to be bullish the dollar," Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said in a telephone interview. "We finally got taper, so the market can stop wondering when it’s coming and focus on other things."

The central bank left unchanged its statement that it will probably hold its target interest rate at almost zero "at least as long as" unemployment exceeds 6.5%, so long as the outlook for inflation is no higher than 2.5%. Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25% since 2008.

The pound, South Africa’s rand, and Mexican peso led gains among the major currencies. "The dovish forward guidance is going to drive the front end of the curve stay fairly low," Sebastien Galy, a New York- based senior foreign-exchange strategist at Societe Generale SA, said in a phone interview. The curve refers to the difference between short- and long-term interest rates.

Market outlook 
The Fed was forecast to start curtailing its monthly bond purchases this week after unexpectedly refraining from reducing them in September, according to 34% of economists surveyed December 6 by Bloomberg, an increase from 17% in a November 8 survey.

The November labour force participation rate of 63% compares with 66.2% in January 2008, Bureau of Labour data shows. The US cost of living was unchanged in November, as cheaper gasoline, new cars and clothing held the consumer-price index in check after a 0.1% drop the prior month.

The yen fell earlier as the nation’s trade deficit widened to a record. Japan’s merchandise trade deficit for November was 1.35-trillion yen on a seasonally adjusted basis, compared with the 1.2-trillion yen median estimate in a Bloomberg News survey of economists. Imports climbed 21.1% from a year earlier while exports rose 18.4%, the finance ministry said.

Japan exports
"The trade data is having a big impact on the yen," said Kathleen Brooks, European research director at Forex.Com in London. "The yen will have the biggest reaction" to a US cut in stimulus because "if the Fed decides to taper, it leaves the BOJ on its own," she said, referring to the Bank of Japan. That may weaken the yen toward 105 per dollar, Brooks said. Bank of Japan officials see significant scope to increase government-bond purchases if needed to achieve their inflation target, according to people familiar with the discussions.

The pound rose for the first time in six days versus the dollar after UK unemployment fell to 7.4% in the three months through October, fuelling speculation the Bank of England will need to raise interest rates sooner than it plans. The Bank of England, led by Governor Mark Carney, has pledged to keep borrowing costs low until unemployment falls to 7%, subject to caveats on financial stability and the central bank’s inflation target of 2%. Sterling added 1.1% to $1.6437. – Bloomberg

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