Dollar Gains as Fed Refrains From Boosting Debt Purchases

June 24 -- The dollar rose against the yen for the first time in four days and advanced versus the euro after the Federal Reserve left its $1.75 trillion bond-purchase program unchanged.

The yen dropped against the South African rand and Norwegian krone as orders for U.S.-made durable goods unexpectedly jumped in May, encouraging demand for higher- yielding assets. The Swiss franc fell against all of its most- traded counterparts on speculation the central bank sold the currency to support the economy.

“The Fed is not standing in the way of rising yields,” said Todd Elmer, currency strategist at Citigroup Global Markets in New York. “For the time being, this provides knee-jerk support to the dollar. The dollar is more sensitive to relative interest-rate differentials recently than to pure swings of risk appetite.”

The greenback gained 0.5 percent to 95.74 yen at 2:42 p.m. in New York, from 95.22 yen yesterday. The dollar appreciated 1.2 percent to $1.3913 against the euro from $1.4077. The euro dropped 0.6 percent to 133.21 yen from 134.04.

The Fed held the target rate for overnight lending between banks in a range of zero to 0.25 percent for a fourth straight meeting.

“Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time,” the Federal Open Market Committee said in its statement after a two-day meeting in Washington.

Interest-rate futures contracts showed a 40 percent chance policy makers would raise the target lending rate by at least a quarter-percentage point to 0.5 percent by December, down from 45 percent odds a week ago.

Quantitative Easing

The dollar plunged a record 3.4 percent against the euro on March 18, when the Fed announced its plan to buy up to $300 billion Treasuries to lower borrowing costs. The strategy, known as quantitative easing, raised concern that it would flood the market with dollars and debase the currency.

The greenback gained 1.3 percent versus the yen when the Fed refrained on April 29 from increasing the amount of assets it plans to purchase.

Since then, borrowing costs rose. Rates on U.S. 10-year Treasury notes and 30-year mortgages increased to 4 percent and 5.59 percent, respectively, on June 11, the highest this year.

“Problems in the U.S. remain whether they announce additional quantitative easing or not,” said Camilla Sutton, director of currency strategy at Scotia Capital Inc. in Toronto, before the Fed’s statement. “Fundamentals are not particularly good for the dollar.”

Weakening Franc

The franc depreciated as much as 2.4 percent to 1.5380 versus the euro and slid as much as 3.2 percent to 1.1023 against the dollar on speculation the Swiss National Bank intervened less than a week after Chairman Jean-Pierre Roth said policy makers will act to restrict “irrational appreciation.”

The declines in the franc were the biggest since March 12, when the SNB said it would buy currencies in its first solo intervention in foreign-exchange markets since 1992. Against the currencies of major trading partners, the franc appreciated yesterday to the highest level since March 11, according to data compiled by the Bank of England.

The Swiss currency extended its drop on speculation the central bank intervened for a second time today. An SNB spokesman, Werner Abegg, said, “We don’t comment on that.”

The yen dropped as much as 2.4 percent to 11.90 versus the rand and slid as much as 1.6 percent to 14.93 versus the Norwegian krone as the gain in U.S. durable goods orders prompted investors to borrow where interest rates are low and buy assets where returns are higher.

Target Lending Rates

The target lending rate of 0.1 percent in Japan compares with 7.5 percent in South Africa and 1.25 percent in Norway.

Bookings for U.S. goods meant to last several years gained 1.8 percent in May, matching the previous month’s increase, the Commerce Department reported. The median forecast of 75 economists surveyed by Bloomberg was for a 0.9 percent drop.

The combined economy of the world’s most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010, the Paris-based Organization for Economic Cooperation and Development reported. The new projections compare with March forecasts for contractions of 4.3 percent and 0.1 percent.

The U.S. currency will emerge from this week’s Fed policy meeting “better biased to weaken,” according to Credit Suisse Group AG.

“The dollar’s immediate problem is market concern about the Fed’s inflation-fighting credibility,” a team of Credit Suisse currency strategists led by Ray Farris in London wrote in a note yesterday, referring to the Fed’s purchases of assets. “We see ways for the Fed to salve some of these concerns, but we doubt the Fed will turn hawkish enough to support the dollar,” Credit Suisse said.