Dotty dollar

11 August 2010 By Christopher Swann

The first rule of currency trading is there are no rules. Even so, the dollar s rise after the Fed s return to easing seems counterintuitive. Yet with banks reluctant to lend, few believe Fed actions will boost the money supply while global slowdown fears could favor the dollar.

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The dollar rose sharply against a basket of major currencies on Aug. 11 for its best oneday performance in nearly two years as investors grew anxious about the global growth outlook.

The dollar index, which measures the greenback against six major currencies, rose 1.8 percent to 82.323. That was its biggest daily gain since October, 2008. Earlier it hit a high of 82.394, its highest level since late July.

The yen was the only major currency to rise against the greenback, which fell to a 15year low around 85.72 yen. The dollar strengthened 2.1 percent against the euro to $1.29. Sterling declined against the dollar for a third day, falling about 1 percent to $1.567

On Aug. 10 Fed policy makers said they would buy between $15 billion and $20 billion in U.S. Treasuries using the proceeds of maturing agency bonds.

The decision to reinvest proceeds from the nearly $1.3 trillion in mortgagelinked debt, acquired during the 2008 financial crisis in an effort to keep borrowing costs down, represents a significant policy shift for the central bank.

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