The euro slumped against the dollar yesterday as the market waited to see if the US Federal Reserve will take further measures to bolster the US economy after a recent slew of bad data, dealers said.
They said there was intense speculation the Fed will act, especially after last Friday’s figures showing the US economy continued to lose jobs, but also concern over where this could lead to.
The Fed was widely expected to keep interest rates at current record lows but it could act to pump money directly into the economy in an effort to boost demand after similar moves at the height of the global financial crisis.
This Quantitative Easing, however, is controversial and is seen to carry the risk that the authorities could get over-extended and the markets too dependent on such stimulus policy.
In late London trade, the euro was down sharply at $1.3088 from $1.3227 in New York late on Monday.
Against the Japanese currency, the dollar was little changed at 85.90 yen after 85.87 yen on Monday.
“The US dollar looks set to post its second consecutive daily gain since mid July... as traders adjust their positions,” ahead of a Fed statement due at 1815 GMT, said Michael Hewson of CMC Markets.
There has been much speculation “that the Fed will increase quantitative easing at their meeting... amid concerns that a failure to do so could send markets spinning lower,” Mr Hewson said.
“It is possible that gains in the dollar (against the euro) will be extended further if the Fed does not announce additional steps to stimulate the US economy,” said Jane Foley, analyst at online trading group Forex.com.
Analysts have been debating possible fresh steps the Fed could take amid growing fears that US economic growth could stall due to an embattled US labour market and lacklustre consumer spending.
“In light of uninspiring economic data, punctuated by Friday’s weaker-than-expected employment result, the uncertainty and even the stakes of the meeting seem to have risen,” said analyst Sacha Tihanyi of Scotia Capital.
Mr Tihanyi sees “a no-win situation” for the dollar after the meeting.
“Should the Fed ease policy, that will likely send US short-term yields lower. Should it remain on hold, then the market is likely to punish the greenback for a central bank that is seemingly indifferent to a wobbling US growth profile.”
In London trade, the euro changed hands at $1.3088 against $1.3227 on Monday, at 112.43 yen (113.60), £0.8305 (0.8317) and 1.3850 Swiss francs (1.3868).
The dollar stood at 85.90 yen (85.87) and 1.0583 Swiss francs (1.0483). The pound was at $1.5759 (1.5905).
On the London Bullion Market, the price of gold fell to $1,192.50 an ounce from $1,203 an ounce on Monday.