The dollar and yen fell broadly on Wednesday, with rallying world share prices reflecting a cooling of risk aversion as investors turned their attention to the US Federal Reserve's policy meeting later in the day. Positive earnings on Wall Street the previous day helped to drive up European and Asian shares, while a key US Senate panel expanded a proposed economic stimulus package to about $887 billion on Tuesday.
The euro found support as consumers in France and Germany showed surprising resilience to widespread business pain with confidence indicators bucking dire expectations. Although US policymakers seem to have run out of interest rate ammunition with the benchmark rate already targeted at zero to 0.25 percent markets will be looking for any announcement of new policy measures, such as purchasing long-dated Treasuries.
Such a move would lower borrowing rates, seen as vital to stabilising the recession-hit US economy. "Everyone is quite rightly expecting something - especially as the Treasury started talking about buying purchasing mortgage backed securities, which they already started doing, and evaluating the merits of buying Treasuries," said Chris Turner, head of FX research at ING in London.
Turner also said that markets would be expecting more from new Treasury Secretary Timothy Geithner on the proposed stimulus package and talk that the US will set up a "bad bank" to mop up toxic assets.
By 1210 GMT the euro was up 0.7 percent against the dollar at $1.3273 and 1.1 percent versus the yen at 118.52 yen. The dollar gained 0.3 percent to 89.25 yen. The pound bounced after its slump to a 23-year low last week, hitting a one-week high of around $1.4325. The euro lost 0.4 percent against sterling to 92.77 pence.
Mirroring ebbing risk aversion, world stocks rose 0.9 percent on the day. The International Monetary Fund (IMF) is due to release revised forecasts later in the day, and a Group of 20 finance official told Reuters on Monday the fund would slash its projection for 2009 global growth to 0.5 percent from 2.2 percent in its last economic outlook in November.
The Swiss franc fell to its lowest level so far this year against the euro after the key KOF economic barometer on Switzerland fell to its lowest since the series began in 1991. The euro hit its highest since late December at 1.5156 Swiss francs.
Meanwhile, data out of Australia overnight showed consumer prices fell by their biggest amount in a decade during the fourth quarter, justifying talk of another aggressive interest rate cut next week. The Australian dollar initially dipped after the data, but the higher-yielding currency later recovered, helped by the pick-up in equities. It was last trading up 1 percent at $0.6691 versus the US dollar.
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