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Dollar dips against euro with eyes on Fed

business Updated: Mar 18, 2009 11:11 IST
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The dollar was slightly lower against the euro in Asia on Wednesday as investors waited to see whether the US Federal Reserve would signal fresh action to tackle the economic downturn.

The yen was little changed immediately after a decision by Japan's central bank to leave its key interest rate at 0.1 per cent while boosting purchases of government bonds to spur lending during the recession.

The dollar was at 98.52 yen in Tokyo early afternoon trade compared with 98.53 in New York late Tuesday. The euro rose to 128.55 yen from 128.32 and to 1.3044 dollars from 1.3016.

The Federal Reserve was expected to leave its main interest rate at close to zero later in the day as it mulls further moves to tackle the recession.

Dealers were focused on whether Fed chairman Ben Bernanke would offer more clues on the outlook for the US economy and fresh tools to spur bank lending.

"We are looking for action by the Federal Reserve," said Masatsugu Miyata, a forex dealer at Hachijuni Bank.

Traders were waiting to see whether the Fed would announce plans to start buying long-term US Treasury bonds to help bring down overall borrowing costs.

If it does, "risk appetite is likely to continue to improve ... and the dollar will continue to retreat," Standard Chartered analysts wrote in a note.

"However, if the Fed does not do this and keeps current policy unchanged, global markets are likely to register their disappointment and the dollar should retrace these losses," they added.

The dollar is seen as a relatively safe bet during times of market turmoil, so it tends to come under pressure when markets show signs of recovery. Wall Street's rise on Tuesday prompted some selling of the greenback.

If stocks go up, "the dollar may fall further," Miyata said.

Japan's central bank said it would spend 21.6 trillion yen (219 billion dollars) a year buying Japanese government bonds outright in an effort to keep credit flowing during the economic downturn.

The announcement came a day after the BoJ said it would lend up to one trillion yen (10 billion dollars) to commercial banks to cover risky debt.

The euro was buoyed by an unexpected rise in investor confidence in Germany, despite a worsening recession in Europe's largest economy.

The ZEW investor confidence indicator, watched for future economic trends, rose 2.3 points to minus 3.5 in March, its best level since July 2007.

The positive news from Germany follows tentative signals in other countries that the economic crisis could be easing, notably comments from Fed Chairman Ben Bernanke that the "green shoots" of recovery are sprouting in the US.