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CURRENCIES: Dollar Lower Ahead Of Fed Meeting

By Deborah Levine

The U.S. dollar declined versus the euro and other major currencies on Wednesday as investors showed renewed appetite for equities and risky assets.

Traders also awaited the conclusion of the U.S. Federal Reserve's two-day policy meeting. An announcement with policy makers' outlook for rates and the economy is expected at 2:15 p.m. Eastern.

The dollar index (DXY), which tracks the U.S. currency against a trade- weighted basket of major rivals, fell to 75.873, down from 76.369 in North American trade late Tuesday.

The euro changed hands at $1.4832, up from $1.4712. The European Central Bank is also slated to gives its latest policy update on Thursday.

The dollar pushed higher against the Japanese currency, however, to trade at 90.65 yen from 90.34 yen Tuesday. The yen is usually the biggest loser when investors want to move toward riskier holdings.

U.S. benchmark stock indexes added to gains even after the Institute for Supply Management's index on the nonmanufacturing sector unexpectedly fell to 50.6 in October, from 50.9 in September. Analysts surveyed by MarketWatch expected the gauge to rise to 51.5. Readings above 50 indicate expansion.

The Standard & Poor's 500 Index (SPX) rose 1.3% in recent action.

"Risk on is the general theme running through foreign exchange markets," said strategists at RBC Capital Markets. "Moves are, however, relatively small ahead of a day packed with data and event risk."

Meanwhile, gold continued to press higher with futures setting another record Wednesday. Gold jumped on Tuesday after India's central bank bought 200 metric tons of the precious metal from the International Monetary Fund.

The dollar remained under pressure on Wednesday after ADP Employment Services said private employers cut 203,000 jobs in October, after a revised 227,000 in September that was fewer than initially reported.

Fed speculation

The overwhelming consensus is that the Fed will hold the federal funds rate steady at near-zero, where the target has been since last December. Investors will be paying close attention, however, to the wording of the Fed's statement for any clue as to when the central bank would begin pushing interest rates higher.

Reports a couple weeks ago suggesting the committee could change the phrasing of the statement away from its previous pledge to maintain "exceptionally low" interest rates for an "extended period" have faded more recently as U.S. economic data have turned more mixed.

"It seems that on balance the Fed is still concerned about the fragility of the financial system and without more compelling evidence that inflation expectations are increasing, officials believe they can afford to be patient," said currency strategists at Brown Brothers Harriman. "We expect no substantial change in this guidance. If there is, it would likely spur another round of dollar short-covering and could weigh on U.S. asset prices."

Since March, the Fed has said it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

In January, it said "for some time" instead of extended period.

"A shift back to their initial wording of holding short rates low for "some time" is a prime alternative," said Steven Ricchiuto, chief economist at Mizuho Securities. "The probability of such a move is only about 30%."

"For the FOMC, the possibility of a double dip has to be taken seriously and the accumulating deflationary pressures" would make such a change premature, Ricchiuto said.

The Fed may also refer to the success of its recently completed Treasury purchase program, though few expect any changes to its ongoing mortgage-related debt buying plan. Both fall into the category of quantitative easing, which tends to weigh on a country's currency.

British pound

The British pound gained ground against the dollar and the euro after a survey of purchasing managers indicated the U.K.'s dominant services sector saw activity rise at its fastest pace in more than two years.

The pound changed hands at $1.6553 versus the dollar, a gain of 0.8% on the day. The bank of England also meets on Thursday and is expected to increase the amount of debt it will buy from the market.

  (END) Dow Jones Newswires
  11-04-091038ET
  Copyright (c) 2009 Dow Jones & Company, Inc.