While you were sleeping: Fed to buy debt, US dollar tumbles

Thursday 19th March 2009

The US Federal Reserve announced plans to buy as much as US$300 billion of Treasury bonds and purchase more mortgage-related debt to ease credit conditions and revive the world's largest economy.

The Fed also said it will keep its interest rate target at zero to 0.25% for an extended period to help keep borrowing costs as low as possible.

"To help improve conditions in private credit markets, the committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months," the Federal Open Market Committee said in a statement.

The committee decided to increase the size of the Fed's balance sheet by buying up to an additional US$750 billion of agency mortgage-backed securities," it said.

The US dollar tumbled against the euro and the yen on the Fed's plans to buy government bonds amid concern the move amounts to printing money and will flood the market with dollars.

The dollar had the biggest drop versus the euro since 2000. The euro strengthened more than 3% to $1.3452, trading above $1.34 for the first time since January.
The dollar weakened to 96.3 yen from 98.6 yen. Japan's currency slid to 129.54 per euro from 128.35.

Treasuries bonds surged on the prospect of purchases by the Fed. The yield on 30-year Treasuries tumbled 21 basis points to 3.62%. The yield on two-year notes fell 20 basis points to 0.83% while benchmark 10-year Treasuries sank 45 basis points to 2.56%.

Stocks also rallied after the Fed's statement, on optimism it will revive the housing market and free up credit. Citigroup jumped 23% to US$3.08, leading the Dow Jones Industrial Average higher. Bank of America climbed 22% to US$7.67. Home Depot rose 5% to US$22.58.

The Dow climbed 1.2% to 7486.58 and the Standard & Poor's 500 rose 2.1% to 794.35.

The Nasdaq Composite rose 2% to 1491.22 after the Wall Street Journal reported that International Business Machines is in talks to buy smaller rival Sun Microsystems for at least US$6.5 billion, almost twice Sun's market price before the news reports came out. Sun soared 80% to US$8.94. IBM fell about 1% to US$92.

American International Group, under political pressure to rein in bonuses and so-called retention pay after receiving US$173 billion in federal aid, surged 42% to US$1.36.

The insurer is considering the sale of blue-chip properties including its New York headquarters and its office tower in Tokyo's Marunouchi business district, which has Japan's most-pricey real estate.

AIG chairman Edward Liddy said some employees have already agreed to return their bonuses and he will prod those paid more than US$100,00 to pay back half of the bonus.

He told a House Financial Services subcommittee that he signed off on US$165 million of bonuses because of his determination to keep the insurer alive.

"Americans are asking quite simply, why pay these people anything at all," Liddy told the committee, according to Reuters. "Here's why: I am trying desperately to prevent an uncontrolled collapse of that business."

Payments to employees at the ailing insurer provoked a public outcry and condemnation from President Barack Obama and Treasury Secretary Timothy Geithner.

Crude oil fell after a report showed US inventories rose more than expected last week, stoking concern demand for fuel is waning. US stockpiles rose by 4.66 million barrels to 349.9 million barrels last week, according to the American Petroleum Institute.

Its counterpart in Japan, the Petroleum Association, reported that processing through refineries abated last week, running at 78.4% of capacity, a decline of 3.8 percentage points from a week earlier.

Crude oil for April delivery fell 1.7% to US$48.32 a barrel on the New York Mercantile Exchange.

Gold futures for April delivery rebounded after the Fed statement on speculation its largesse will fan inflation and spur demand for the precious metal. The contract reached US$940.40 an ounce in New York from US$922.

In the UK, unemployment benefit claims rose by the most since 1971, with 138,400 last month, swelling total claims to 1.39 million, according to the Office for National Statistics.

The pound fell as low as $1.3845 and was recently at $1.4251.

The FTSE 100 fell 1.4% to 3804.99, with Rio Tinto dropping 6.8% and Xstrata declining 3.7%.

The Dow Jones Stoxx 600 Index fell 0.8% to 170.76. Germany's DAX 30 climbed 0.2% to 3996.32 and France's CAC 40 slipped 0.3% to 2760.34.

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