Dollar In Partial Recovery From Post-FOMC Rout

Published: March 21, 2009

(Dow Jones) – The dollar managed Friday to retrace some of its recent sharp losses in a partial recovery from one of its worst weeks in several decades.

The U.S. currency had been battered severely by the Federal Reserve’s announcement Wednesday of its new plan to revive the economy. Fears that a monetizing of U.S. debt would debase the dollar had placed the euro and other currencies on track for significant gains.

Even with Friday’s advance, the dollar suffered its biggest single-week decline since 1985 on the dollar index (DXY), which measures the U.S. currency against a basket of six major currencies.

National Bank’s Toronto-based managing director of foreign exchange Jack Spitz termed Wednesday’s Fed actions a “watershed moment in terms of dollar sentiment globally.”

Friday’s quiet tone in currency markets stood in stark contrast to the tumultuous movements earlier in the week, when an already sagging dollar plunged in the wake of the Fed announcement that included the purchase of $300 billion in long-term Treasury bonds during the next six months, among other actions.

In trading characterized mostly by end-of-the-week position-squaring and illiquidity due to a holiday in Japan, the dollar rallied back against the euro and yen Friday, and notched more modest gains against a range of other currencies as well.

Nevertheless, the euro exited active trading with one of its biggest weekly advances versus the dollar since the single currency’s introduction in 1999, said Brian Dolan, chief currency strategist at electronic trading platform Forex.com. The euro was up nearly 5% from $1.2920 a week ago.

Late Friday, the euro was at $1.3560 from $1.3678 late Thursday and the dollar was at Y95.90 from Y94.41, according to EBS. The euro was at Y130.07 from Y129.14. The U.K. pound was at $1.4440 from $1.4518. The dollar was at CHF1.1295 from CHF1.1228 Thursday.

The dollar’s decline might have carried over into Friday were it not for the reversal that occurred in European trading when the euro suffered from chatter that the European Central Bank may be preparing to substantially increase its bailout plans for struggling euro-zone and eastern European economies.

Talk had been circulating during a two-day summit of European Union leaders in Brussels that the ECB had created a contingency fund to rescue troubled euro-zone economies, including those of Ireland and Greece.

But E.U. leaders, finance ministers and the ECB on Friday said no such fund has been established. German Finance Minister Peer Steinbrueck told a news conference after the summit that the euro zone is ready to help any member country in need, but said no member is currently in that position.

Nevertheless, the European developments played into a market impulse for some stabilization and consolidation of the extreme moves of the previous two days, said National Bank’s Spitz.

“The market was looking for reasons to pare back short dollar positions, and the ECB rumors were the catalyst and gave the market an opportunity to square up positions going into the weekend,” Spitz said.

The corrective tone carried over into North American trading Friday, as U.S. stock markets continued to flounder despite the Federal Reserve’s new liquidity injection plan, encouraging some investors to cautiously inch back into U.S. dollar positions on safe-haven considerations.

Currency markets showed little immediate reaction to comments Friday from Fed Chairman Ben Bernanke. He said the Fed’s actions have helped the economy and the financial system and that he is encouraged by market response to the Fed’s credit programs.

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