The U.S. dollar gained further against the euro in Asia on Monday amid political concerns surrounding Italy, with markets also looking ahead to this week’s Federal Reserve meeting for clues on continuation of its policy to purchase longer-dated securities.
The ICE dollar index , which measures the greenback’s performance against a basket of six major global currencies, climbed to 80.487 from 80.408 late in North American trade Friday.
The euro fell to $1.2912 from $1.2931, amid worries over the political situation in Italy, after Prime Minister Mario Monti said over the weekend he was ready to resign as soon as parliament clears a pending budget bill, a move that was likely to set the stage for early elections.
“Last week’s sharp downward growth revisions to Eurozone growth by the European Central Bank, a plunge in U.S. consumer sentiment and comments from Italian Prime Minister Monti that he intends to resign will cast a shadow over markets, restraining any upside,” said Mitul Kotecha, global head of foreign exchange strategy at Credit Agricole.
The euro’s drop extends its fall from Friday, weighed by concerns the ECB might lower interest rates in view of the central bank’s weaker economic outlook.
The dollar’s gains Monday came after official data from China showed the country’s exports growth and trade surplus fell way short of expectations in November.
Meanwhile, investors also looked ahead to the outcome of the Fed’s monetary policy meeting on Wednesday, where the central bank is expected to outline whether it will continue purchases of longer-dated securities under a policy that is popularly known as Operation Twist.
Operation Twist, the name given to the Fed policy of selling short-term Treasurys in exchange for buying longer-term securities, expires at the end of this year.
Analysts at Credit Agricole and RBC Capital Markets said they expect the Fed to continue purchases of longer-dated securities even after Operation Twist’s expiry, by combining such purchases with the other long-maturity bonds that it buys at present.
Royal Bank of Scotland strategists, led by Drew Brick, wrote to clients that while the Fed was likely to continue buying $40 billion worth of mortgage-backed security each month, whether it would keep its total asset purchases at $85 billion a month, or lower the amount slightly, was “the key question at hand.”
“Put simply: Those $85 billion in those monthly Fed-funded flows may well be the nominal amount needed to avoid a risk market collapse. Indeed, in the eyes of some risk-takers out here in Asia, the Fed’s some $3 trillion balance sheet has become nothing less than a buffer between myth and reality in a market where pricing remains fundamentally obscured,” the RBS strategists added.
Among other major currency pairs, the British pound fell to $1.6028 from $1.6041, while against the Japanese unit, the U.S. dollar was changing hands at 82.42 yen compared with ¥82.14.
Marketwatch
