News in brief

• The Federal Reserve's projection for near-zero interest rates until the latter part of 2014 pushed the dollar to a 2012 low against the euro. The dollar dumped immediately against nearly all currencies after the Fed surprised market participants in a statement that was far more dovish than anybody was expecting at the conclusion of the conference when Chairman Ben Bernanke affirmed the long period of extremely low rates.
• Nine out of the 17 members expect the bank's benchmark rate to be at or below 0.25% by the end of 2013 and 11 see rates at or below one per cent by the end of 2014. It is currently set at a target rate between 0% and 0.25%.
• The Fed's statement quickly poured some cold water over long-term optimism for the dollar, leading many traders to unwind speculative positions the currency would rise. As of January 17, long dollar positions against the euro held at the Chicago Mercantile Exchange were at their highest level in at least four years, according to the most recent available data from the Commodity Futures Trading Commission. Essentially, this is because the dollar once again becomes a cheap currency that can be used to fund trades against other higher yielding assets. Comments form traders suggest that Pro cyclical growth and high yielding currencies such as the Australia, New Zealand and Canadian dollars will become more attractive options than the US dollar due to the better yields.
• On the UK front, Bank of England policy makers voted unanimously in January to keep UK monetary policy on hold but at least some of its rate-setters appear ready to sanction another dose of stimulus, minutes of the BOE's rate-setting Monetary Policy Committee showed yesterday. All nine of the MPC's policy makers agreed to keep the central bank's key interest rate at a record low of 0.5% and its stock of asset purchases at GBP275 billion.
• "A change in policy at this meeting was not warranted," the committee concluded, as there had been little change to the outlook for inflation since previous meetings. The annual rate of inflation in the UK slowed to 4.2% in December from 4.8% a month earlier, and the central bank expects it to slow sharply this year as temporary factors boosting prices lose influence. Its forecasts suggest inflation may slip below its two per cent target by the end of the year.
• For some MPC members, "the risk of undershooting the target meant that a further expansion of asset purchases was likely to be required," the minutes said, suggesting further stimulus could be imminent. In a speech in Brighton, late Tuesday, BOE Governor Mervyn King said there is scope for the central bank to buy more bonds should its forecasts demand it. Economists believe the MPC will sanction a further dose when its current round of asset purchases, which started in October, are completed in February. Those expectations were reinforced yesterday by preliminary data that suggested the UK economy contracted in the final quarter of 2011, raising the spectre of a return to recession.
• A further expansion of the BOE's asset purchase program appears to be "a question of when and not if," said Simon Wells, chief economist at HSBC, in a note to clients. Wells expects the BOE to approve a further GBP75 billion of bond purchases next month. However, the January minutes suggest that support for further stimulus may not be universal. For some MPC members, "the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term," the minutes record. Inflationary concerns centre on rising unit labour costs, which suggest wages are outpacing productivity gains and may lead firms to raise prices, and simmering tensions in the Middle East, which could push up oil prices. "There is every chance that additional asset purchases will not garner unanimous support," said Simon Hayes, an economist at Barclays Capital.
• Overnight, the dollar struggled for direction against the yen in Asia as mixed sentiment prevails over the announcement toward easier monetary policy in the US and what appears for the moment to be some respite in the European sovereign debt crisis. On face value the Fed outcome was more dovish than expected, but a closer examination shows "the (Fed's) highest priority is employment," comments from Mizuho Corporate Bank. "The reference to 2014 could be lip service to support the stock market."
• Yesterday, the Fed formally declared a long-run inflation target of two per cent. At a later press conference, however, Fed Chairman Ben Bernanke suggested that he might let inflation run higher for a little while if it would help to bring down unemployment. The yen was at Y101.88 from Y101.95 and the ICE Dollar Index, which tracks the US dollar against a basket of currencies, was at 79.447 from 79.482.