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Thursday March 19, 2009 - 09:38:31 GMT
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FOREX NEWS-Dollar nurses mammoth loss after Fed opens taps

Thu Mar 19, 2009 5:27am EDT

* Dlr attempts poise after biggest 1-day slide since 1985

* Fed stuns mkts; decides to buy long-term Treasuries

* Profit-taking tempers dollar's losses for now

* Euro/dlr hits 2-month high, more gains round the corner

(Changes dateline, byline, adds quotes, new prices PVS TOKYO)

By Veronica Brown

LONDON, March 19 (Reuters) - The dollar attempted to recover its poise on Wednesday, after its biggest one-day loss since at least 1985 as the Federal Reserve stunned investors by saying it would buy long-term debt in an effective printing of money.

The Fed will purchase $300 billion of long-dated Treasuries over the next six months, its first large-scale purchases of government debt since the early 1960s, while also boosting buying of mortgage-backed securities and agency debt in its bid to rescue the economy. [ID:nN18343369]

The move raised risks that a sharp expansion of the Fed's balance sheet -- which has already doubled in size in the past six months -- would lead to oversupply of the world's main reserve currency.

"We'll have to see how this pans out, but ultimately the Fed are printing paper, the UK are printing paper, the Swiss are printing paper, the Japanese are printing paper -- they are all at it and I don't want to buy those currencies," said David Bloom, global head of FX research at HSBC markets in London.

"I don't believe in the argument that its going to create economic growth and you will get portfolio flows -- forget it, they are sorting out a crisis," he added.

The dollar's cachet as a refuge from risk also melted as stock markets cheered the Fed's attempt to resuscitate lending. The vix "fear gauge" of equity market volatility fell to its lowest since late January on Wednesday.

U.S. Treasuries surged, causing the biggest one-day drop in 10-year yields since the 1987 stock market crash, compounding the dollar's woes <US10YT=RR>.

The dollar index, a gauge of its performance against a basket of major currencies, was flat at 84.177 .DXY after a 3 percent slide on Wednesday -- its biggest one-day drop in at least a quarter of a century.

The euro eased as investors booked profits after it jumped 3.8 percent on Wednesday for its biggest one-day rise since its launch in 1999, according to Reuters data.

The single currency hit a two-month high of $1.3536 on trading platform EBS early in the global session. It was last down 0.2 percent at $1.3476 <EUR=>.

Against the yen, the dollar was broadly steady at 95.75 yen <JPY=> after falling almost 3 percent on Wednesday.


ING strategists said the euro would be a major beneficiary of the Fed's 'shock and awe' policy, adding that new dollar supply and debt monetisation meant a run-up to the $1.40 area could be on the cards even though the single currency bloc faces its own problems.

"Those positive on USD are left to consider...if market optimism will prove short-lived and/or whether the dollar is on a long-term trend appreciation," ING said in a note to clients

Daily technical charts show that the euro now faces resistance at $1.3635. Above that lies the 200-day moving average near $1.3900.

The Fed is not alone in conducting large-scale buying of government debt. The Bank of England is buying 75 billion sterling of gilts and the Bank of Japan on Wednesday announced it would increase its purchases of Japanese government debt. [ID:nLI397120] [ID:nT8455]

The Swiss National bank last week shocked investors by combining a rate cut with FX and bond market intervention to keep interest rates low.

The European Central Bank has mulled non-standard policy measures after cutting interest rates to a record low 1.5 percent in March. [ID:nLI37571] But many don't expect to see quantitative easing implemented soon. (Additional reporting by Masayuki Kitano in Tokyo; Editing by Toby Chopra)

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