Page last updated at 17:18 GMT, Thursday, 19 March 2009

Dollar slides after US Fed plan

Dollars
Investors fear that more dollars means less value for each note

The dollar has fallen against all major currencies after the US Federal Reserve announced a plan to buy $1.2tn (£843bn) of debt to boost its economy.

The dollar fell by 4.2% against the euro and by 3.9% against the pound.

The US currency also declined against the yen, the Norwegian krone, the Australian dollar and Brazilian real.

The Fed's decision to buy debt means it is effectively creating new money, leading to concern from investors about the over-supply of dollars.

Dollar rally ends

The dollar traded at $1.4543 against the pound, its lowest since late February.

The US currency also had its biggest drop against the euro in over two months, to $1.3693 versus the 16-nation European currency. Against the yen, the dollar bought 94.10.

HOW QUANTITATIVE EASING WORKS
Central bank expands money supply by using newly created money to buy assets from banks and other financial institutions
Aims to boost the economy by giving sellers of these assets money to spend on goods, services or more assets

The decline in the dollar ended its rally so far this year, which has seen the US dollar rise by more than 2% against most major currencies.

The Fed said on Wednesday that it would buy long-term government debt and expand purchases of mortgage-related debt to help stimulate an economy in the midst of the worst economic crisis since the Great Depression.

It said it would buy up to $300bn worth of government debt, known as US Treasuries, over the next six months, as well as an additional $750bn of mortgage-backed securities to boost mortgage lending.

It also said it would buy debt issued by government-sponsored agencies such as Freddie Mac, which supports the mortgage market.

Market reaction

BBC economics editor Stephanie Flanders said the decision to buy Treasury bills came as a "shock" to investors.

"Why have this new spending spree at all?" she said. "The answer may be that the Fed - and the administration more generally - is concerned that the apparent improvement in credit conditions the past few months is a false dawn."

The surprise registered in the stock market, as the Dow Jones shares index jumped 90 points on Wednesday.

Following the Fed's announcement the yields payable to holders of government bonds also fell sharply.

The yield on the benchmark 10-year Treasury note fell to 2.5% percent from 3.01% - its biggest one-day slide since the Wall Street crash of 1987.

The Bank of England has already begun buying government debt to expand money supply - known as quantitative easing - while Japan said on Wednesday it would step up its purchases of government debt.



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