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Thu 23 Jun 2011 10:25 AM

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US Fed's stance lifts dollar, sterling turns ugly

US Federal Reserve confirms it is ceasing its $600bn bond-buying programme at the end of June

US Fed's stance lifts dollar, sterling turns ugly

The dollar extended its gains from the previous day on
Thursday as sovereign Asian players bought it back after the Federal Reserve
confirmed it was ceasing its $600bn bond-buying programme at the end of June
and gave no hint of further economic stimulus.

Sterling slumped to three-month lows against the greenback
after the Bank of England raised the prospect of offering more stimulus, in
contrast to the Fed.

The dollar index , which tracks the US currency's moves
against six major currencies, hovered above the Ichimoku cloud and investors
said it could approach resistance at its 100-day moving average at 75.63 in
coming weeks.

"But it all hinges on interest rates. Investors are
buying back the dollar for now, and there even may be some who are going long,
but yields on US Treasuries would have to rise to help it break the downward
trendline off its 2010 highs," said Teppei Ino, currency analyst at Bank
of Tokyo-Mitsubishi UFJ.

The closely watched 10-year Treasury yield was still below
the crucial 3 percent line, although it rose 2/32 in price to yield about 2.973
percent , staying almost unchanged from 2.974 percent in late US trade on

The dollar index has lost more than 15 percent in the last
year as dollar interest rates hovered at record lows and as some investors saw
the greenback as an attractive funding currency.

Other market players said they were now eyeing a June 16
high, with many suggesting that if the dollar could decisively break above the
76.02 hit that day, it may post further gains in coming months.

"Taking a step back, I would say that at this stage the
dollar has stopped its long-term fall, and investors need to wait for more
signals about the US economy to pile more aggressively into it," Ino said.

The Fed reiterated it would continue to reinvest principal
payments from its holdings and that the US recovery should gradually pick up
heading into 2012, even as it cut its forecasts for economic growth.

Analysts said unless the economic situation deteriorated
markedly, another round of stimulus from the Fed looked highly unlikely.

The dollar last traded at 80.45 yen , pulling up from
Wednesday's trough around 79.98, having hit the session's peak of 80.65 after
triggering stop losses around 80.50 and as importers chased it higher at the
local fixing.

Some traders cited Asian sovereign players scooping up the
dollar across the board, while a US bank was seen buying USD/JPY, with a dollar
offer by a major Japanese bank capping gains.

The dollar also firmed against the euro, which fell 0.4
percent to $1.4305, well off Wednesday's high near $1.4441. Immediate support
is seen around $1.4300, a 38.2 percent retracement of the June 16-22 rise.

The outlook for the single currency remains tied to
developments in Greece, with markets now squarely focused on a meeting of
European leaders on Thursday and Friday.

They will try to convince Greeks and financial markets that
they have a workable plan to help Athens avoid a debt default and return to
financial stability.

A trader for a Japanese brokerage said the market may still
be long in the wake of its rise the previous day, after the Greek government
won a vote of confidence. "I think it may be better to try to sell the
euro on rallies," the trader said.

The dollar also strengthened against commodity currencies
like the Australian dollar. The Aussie dipped to $1.0553 , down about a cent
from Wednesday's high.

It came back up after being offloaded to the session's low
of 1.0533 after China's purchasing managers' survey showed factory-sector
growth was close to stalling in June even as price pressures eased, reflecting
the impact of tightening in monetary policy and slack global demand.

Sterling sagged to three-month lows after minutes of the BoE June meeting released on Wednesday signalled UK interest rates were unlikely to rise from their record low 0.5 percent this year and flagged a greater chance of the BoE opting instead for more quantitative easing.

The very idea of the BoE printing more money saw sterling promptly fall to $1.6050 , lows not seen since April 1. It later lost more ground, falling to as low as 1.6017.

It also declined against the euro, which at one point rose to a two-week high of 89.53 pence , on track to test its June 8 high of 89.76 pence.

"The pound, in the process, has inherited the mantle of 'worst currency in Europe'," said Kit Juckes, strategist at Societe Generale.