The dollar plunged against other major currencies again Thursday, as markets considered the long-term effects of the Federal Reserve's decision to pump more than $1 trillion into the financial system.
The buck has dropped more than 6 cents against the euro in the past two days, including a record 3.51 percent fall Wednesday, as economists fear the Fed's massive bond-buying program could prompt inflation and weaken the dollar against other currencies.
The Fed said Wednesday it will buy up to $300 billion of long-term government bonds over the next six months and will also step up its purchases of mortgage-backed debt securities. The effect of the actions will be to add hundreds of billions of dollars of new money into the financial system in an effort to break a logjam in lending with lower interest rates.
Although investors initially celebrated the news, they quickly began to focus on the dollar's decline and whether the currency might eventually inflate its way out of the value of those debts, said Joseph Trevisani, chief market analyst at FXSolutions.
"The Fed has barely gotten started with this process, and the reaction has been stunning," Trevisani said. "This has brought what was once seen as on the horizon to a next-day event."
If the dollar continues to weaken substantially, "it will create many more problems for the government and the American consumer," Trevisani said. "It could completely undermine what they are trying to do."
On Thursday, the euro soared against the dollar to $1.3662 from $1.3424 late Wednesday in New York, reaching its highest level since early January. The British pound, meanwhile, jumped to $1.4511 from $1.4223.
The dollar also fell sharply against the Japanese currency, buying 94.53 Japanese yen Thursday compared with 96.31 yen the day before.
In other New York trading, the dollar dropped to 1.1248 Swiss francs from 1.1440 francs late Wednesday, and fell to 1.2382 Canadian dollars from 1.2498.
Meanwhile, commodities, which are bought and sold in dollars, soared.
Benchmark crude for April delivery jumped 7 percent to settle at $51.61 a barrel on the New York Mercantile Exchange. Oil prices hit $52.25 earlier in the day, a price last seen on Dec. 1. Gold surged about $70 an ounce to trade near $960.
"Gold is a good indication about worries about inflation, because people buy it up when there's a lurking suspicion things will get worse," Trevisani said.
Bank of New York Mellon Corp. currency analyst Michael Woolfolk said he expects that any dollar weakness as a result of the Fed's actions will be temporary. The timing of the Fed's announcement was "unfortunate" for the dollar, he said, coming on the heels of a rally in stocks and improving sentiment about the U.S. economy.
The Fed's plans to buy bonds issued by its own government followed similar moves from the Bank of England and the Japanese and Swiss central banks.
That cannot last, however, said Woolfolk. The ECB will very likely have to launch its own extraordinary monetary tactics, but the timing is uncertain. The dollar will stay below its fair market value until the ECB makes known how and when it will pursue its own measures for increasing the supply of euros, he said.
Some analysts agreed that the recent drop in trading isn't a precursor to a dollar crisis.
"The reality is it could be a very long time before the Feds' printing of money does anything to the level of prices," David Gilmore of Foreign Exchange Analytics in Essex, Conn. "Meanwhile, everyone in the world is in the same boat. For the dollar to fall much further against other currencies in some kind of semi-permanent fashion, you've got to sell me a better story somewhere else in the world."
John Merrill, chief investment officer of Tanglewood Wealth Management in Houston, contends the dollar fell in part because it had help up so well in recent months despite weak economic news and that a decline was overdue. He said he doesn't believe the dollar will fall because of demand overseas for commodities, which are priced in dollars.
"I don't think it's going to plunge from here," Merrill said.
AP Business Writer Tim Paradis contributed to this report.
Source: AP News