The dollar fell broadly and hit a two-month low against the euro today as expectations grow that the Federal Reserve will cut interest rates to near zero and may lay out emergency tools to curtail a recession.
The euro extended gains above $1.37 as repatriation flows into the dollar ebbed and technical players jumped back into buying the single currency to cover short positions before the year-end.
As signs mounted that the United States may be facing a deep and protracted downturn, the Fed is widely expected to cut interest rates by at least a half percentage point to 0.50 per cent at its two-day policy meeting ending later in the day.
Investors will also focus on the accompanying statement for clues on whether the Fed will clearly state it will deploy so-called quantitative easing to restore growth.
Fed Chairman Ben Bernanke said earlier this month that the Fed could purchase long-term securities issued by the Treasury or government-sponsored agencies to cut yields and stimulate demand.
The dollar has lost steam this month, having risen broadly since the summer, when financial market turmoil prompted investors to liquidate investments across the world and convert funds into the greenback.
The euro rose 0.2 per cent from late New York trade yesterday to $1.3719 after earlier rising as high as $1.3738 on trading platform EBS, the highest since mid-October.
The sharp rebound in the euro had taken the currency right up to the 38.2 percent retracement of its July-October slide at $1.3740, a key resistance point.
The euro had already broken through several resistance levels above a 2-½ year low around $1.2330 hit in late October. The technical break added momentum to short-covering in the single currency before the end of the year, traders said.
"The euro and other European currencies which were trading in a range in the past month or so are now being bought back against the dollar, catching up with the yen's gains versus the dollar," said Shuichi Kanehira, a senior trader at Mizuho Corporate Bank.
Against the yen, the euro edged down 0.1 per cent to 123.97 yen but stayed close to a three-week high around 124.55 yen touched the previous day.
The higher-yielding currency New Zealand dollar hit a one-month high against the US dollar on prospects for a Fed rate cut. The kiwi rose 0.7 per cent to $0.5580 after rising as high as $0.5598, the highest since mid-November.
Reuters