The dollar headed for its worst day in more than three months on Wednesday, reversing the previous session's rally after an influential consultancy said the Federal Reserve plans to buy $500 billion of Treasuries over six months and leave itself room for more buying.
The dollar hit a 15-year low beneath 81 yen and the euro climbed near $1.40 as markets expect the Fed to start pumping money into the US economy as soon as November, a policy known as "quantitative easing," which has driven the dollar down since September. The report from Medley Global Advisors accelerated a dollar sell-off that began overnight as traders said the market's reaction to China's interest-rate hike on Tuesday was overdone. The safe-haven dollar posted its best day in two months after China's tightening fuelled worries about global growth.
The Medley report echoed comments made on Tuesday by a Fed official that $100 billion a month in bond purchases may be appropriate, giving traders an incentive to push the dollar lower. "Dollar weakness into the November 3 FOMC meeting is the clearest trade right now. Investors want to continue on that path," said Amelia Bourdeau, senior currency strategist at UBS in Stamford, Connecticut. The US dollar index, which tracks the greenback versus a basket of six currencies, fell 1.2 percent to 77.210, on track for its biggest daily percentage drop since July 1.
The euro rose 1.6 percent to $1.3951, the biggest daily increase since July 1. It had earlier risen as high as $1.3991 on trading platform EBS and off a $1.3697 session low. Traders said $1.40 remains a strong resistance and selling interest was clustered around $1.4010-20. Citigroup currency strategists recommended going long the euro at $1.3845 with a $1.5145 target, a level last approached in November 2009.
The dollar hit a 15-year low at 80.84 yen on EBS and was last down 0.5 percent at 81.16. Japan spent a bit more than $20 billion last month to weaken the yen, but that failed to keep the dollar from nearing its record low of 79.95 yen. The dollar showed little reaction to the Fed's Beige Book report, which offered further evidence the economy is stuck in a weak recovery.
Dean Popplewell, chief strategist of FX brokerage OANDA in Toronto, said that with uncertainty persisting over the size and scope of the Fed stimulus, he expects to see "further volatility and probably a weaker dollar" until the central bank's meeting next month.