Aussie slips after Fed extends bond-buy plan
LOS ANGELES (MarketWatch) -- Australia's currency slipped against the U.S. dollar in North American trading Wednesday, with the greenback sent higher against major rivals after the U.S. Federal Reserve said it will extend its holdings of long-term government bonds in a bid to aid the economy.
But the aussie (AUDUSD) , along with other assets, managed to pare its loss as traders "combed through" the Fed's statement and found that policy makers "did drop hints" they were considering further stimulus measures, said Kathy Lien, managing director of FX strategy at BK Asset Management, in a telephone interview.
The aussie recently traded at 98.99 U.S. cents. Just after the Fed's monetary-policy decision, it fell to 98.44 U.S. cents from its late-Tuesday level at $1.019. Traders "initially were disappointed" by the Fed's statement as the market had been positioning for the possibility of the launch of a third round of large-scale asset purchases, known as quantitative easing, she said.
The aussie this week reached six-weeks highs in anticipation that the Fed would enact more stimulus measures. Last Friday, the aussie closed above $1 for the first time since May 11.
The Federal Reserve said Tuesday it will continue its so-called Operation Twist program by extending its holdings of long-term government bonds by $267 billion through the end of the year. The program-- aimed at spurring borrowing and spending through the reduction of long-term rates -- had been scheduled to end this month. More on the extension of the Fed's Operation Twist program.
But the Fed's interest-rate setting committee also said in its statement that it "is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." See the statement from the Fed.
The extension of Operation Twist comes after a slate of recent economic reports has illustrated sluggish conditions in the world's largest economy. Consumer spending has slowed, noted the Fed, adding that it "anticipates that the unemployment rate will decline only slowly," and for economic growth to pick up "very gradually."
Federal Reserve Chairman Ben Bernanke told reporters following the Fed meeting that more quantitative easing is something that it would consider.
Lien noted that the U.S. central bank's consideration of further stimulus action sits in contrast to the current stance of the Reserve Bank of Australia, with minutes from its recent meeting suggesting there will be no more easing in the near future. The RBA has cut its cash rate four times since November, leaving it at the current level of 3.5%.
The Federal Reserve on Tuesday also cut its growth and inflation forecasts over the next three years, and said it expects the U.S. unemployment rate to stay above 8% through the end of this year.