Dollar, Yen Fall as Attention Turns to Fed Meeting

The dollar and yen fell Wednesday as optimism about stimulus spending lifted stock markets and investors looked to the end of a Federal Reserve meeting for word of new efforts to jump-start bank lending.

Sterling continued its rebound from last week's 23-year low against the dollar while the euro also rose, helped by surprise gains in French and German consumer confidence, though a round of profit-taking knocked it off a session peak above $1.33.

Hopes for the creation of a U.S. "bad bank'' to mop up toxic assets and Tuesday's U.S. Senate panel move to widen a proposed stimulus package to about $887 billion also boosted confidence, blunting the appeal of the safe-haven dollar and yen.

Investors focus was turning to the Fed, which ends its policy meeting later on Wednesday. With interest rates already targeted near zero, markets will be on alert for word of new policies, such as buying long-dated U.S. government bonds.

"My sense is that the U.S. administration is not of the opinion that the Fed is out of ammo,'' said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut.

That, he said, means if the central bank announces new, unconventional policies, "it is crucial that the Fed gets in front of the public and explains itself—something a few sentences in a statement can't possibly address.''

The euro was up slightly at above $1.32 after an earlier move above $1.33 sparked selling interest. It rose over 1 percent to near 119 yen while sterling added over 1 percent to above $1.43 after falling to $1.3502 last week.

The dollar rose nearly 1 percent to slightly below 90 yen , and Steven Butler, head of currency trading at Scotia Capital in Toronto, said a move above 90.20 yen could set up even bigger gains.

The Australian dollar rose over 1 percent to near $0.67 after data showing the biggest decline in consumer prices in a decade left investors expecting aggressive interest rate cuts and stimulus spending.

The U.S. dollar also fell over 1 percent against its Canadian counterpart to below C$1.21 after Ottawa pledged billions in tax cuts as part of a new stimulus package.

Waiting for the Fed

Any move by the Fed to buy Treasury debt would cut the government's borrowing costs, making it easier to stabilize the struggling economy. Gilmore said that would likely boost risk appetite further and weigh on the dollar and yen.

There were also worries that the U.S. dollar will soon bend under the weight of the Fed's ever-expanding balance sheet.

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"I just keep worrying that we're digging ourselves in deeper and deeper. I get the feeling that it's going to take a long time for all this to be unwound,'' Butler said.

Still, analysts were quick to point out that the global economic outlook remained gloomy despite the short-term recovery in risk taking.

"Global growth and demand are still the key and confidence is shot,'' IDEAGlobal strategist Maurice Pomery said in a note to client. "The bigger themes remain and I still believe the dollar will do well and yen strength with continue.''

The International Monetary Fund chief Dominique Strauss-Kahn underlined the scale of the crisis, saying the fund risked running out of money if it had to meet all potential claims on its resources.

The IMF on Wednesday, cut its 2009 global growth forecast to 0.5 percent from 2.2 percent.

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