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Last updated: June 20, 2012 7:46 pm
The US dollar briefly surged on Wednesday after the US Federal Reserve moved to extend its asset purchase programme, Operation Twist, and said it remained prepared to take further action if necessary.
The market had expected a minor extension of Operation Twist, which seeks to lower longer-term borrowing costs, but some traders had expected more drastic monetary easing to be announced.
And while market watchers described the Fed’s move as risk positive there was also a suggestion that a failure to deliver a more radical policy move, alongside some profit taking, was behind the dollar’s initial reaction.
However, Deutsche Bank’s Alan Ruskin said experience has shown that on a multi week basis, the dollar had nothing to fear from balance sheet neutral actions such as Operation Twist.
“Twist has been associated with lower long-term rates, and a flatter yield curve that is historically associated with dollar strength,” he added.
The US dollar index gained 0.3 per cent to 81.6 points in response to the announcement while the dollar leapt 0.4 per cent against the euro to a session high of $1.2724 before falling back to trade up just 0.1 per cent against the single currency. The euro remained supported by reports from the G20 summit in Mexico of a commitment to driving down borrowing costs across the single currency area and by the formation of a new coalition government in Greece.
After falling sharply, sterling pared its losses following the release of the BoE’s minutes from its last policy meeting in early June.
The minutes furthered a belief, already strengthened by falling UK inflation, that the Bank of England would increase its asset purchase programme at its next meeting in July.
Five members of the Monetary Policy Committee voted to hold the asset purchase programme steady at its current level of £325bn while four members, including governor Mervyn King, voted to increase it by between £25bn and £50bn.
Most members of the committee “judged that some further economic stimulus was either warranted immediately or would probably become warranted”.
Sterling fell 0.4 per cent against the US dollar to $1.5664 and 0.4 per cent against the Japanese yen to Y123.56 immediately following the release, but recovered to trade up 0.5 per cent against the yen and down just 0.1 per cent against the dollar.
The Norwegian krone advanced 0.6 per cent against the dollar to NKr5.9070 and up 0.5 per cent against the euro at NKr7.5016 as the Norwegian central bank kept its main interest rates unchanged.
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