Dollar Falls to 8-Week Low Versus Yen as Fed May Buy More Debt

May 21 (Bloomberg) -- The dollar fell to an eight-week low against the yen on speculation the Federal Reserve will boost purchases of assets to counter the global slump, increasing the supply of the U.S. currency.

The yen gained versus all 16 most-traded currencies on concern the worst of the financial crisis is not over after the Fed predicted a deeper recession. The euro traded near a four- month high against the dollar before a European report that may show the contraction in manufacturing and service industries slowed, backing the case for the European Central Bank to leave interest rates unchanged.

“The Fed may expand its asset-purchase program, which would increase the supply of greenbacks in the market,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This could undermine the value of the dollar and spur investors in the U.S. to put their funds overseas.”

The dollar slid to 94.46 yen as of 9:23 a.m. in Tokyo after touching 94.33 yen, the lowest since March 20, from 94.88 yesterday in New York. Japan’s currency advanced to 130.05 per euro from 130.77. Europe’s 16-nation currency traded at $1.3768 from $1.3780 yesterday, when it reached $1.3830, the strongest level since Jan. 5.

The Dollar Index, used by ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped 0.1 percent to 81.120 after yesterday touching 80.91, the lowest level since Dec. 31.

Fed Purchases

Some Fed policy makers said “a further increase” in the total amount of asset purchases might be needed to speed a U.S. economic recovery, while all agreed to hold off on such a move, minutes of the April 28-29 meeting showed.

The dollar dropped a record 3.4 percent versus the euro on March 18, when the Fed announced plans to buy up to $300 billion in U.S. government debt to keep interest rates low and stimulate the economy, a measure known as quantitative easing.

The euro may gain for a fourth day versus the dollar before a European report that may show the region’s manufacturing and services contracted at the slowest pace in seven months.

A composite index of activity in both industries rose to 42 in May from 41.1 in April, according to the median estimate in a Bloomberg survey of economists.

Investors reduced bets European policy makers will cut their 1 percent benchmark at the June 4 meeting. The implied yield on the three-month Euribor futures contract for June delivery was 1.195 percent yesterday, from 1.105 percent at the beginning of the week.

Technical Support

Declines in the dollar against the yen may be limited as a chart some traders use to predict price movements signals today’s drop to the lowest level in eight weeks was overdone.

The dollar’s 14-day stochastic oscillator against the yen fell to 17 today, below the 20 level that signals the U.S. currency may have fallen too quickly and is poised to strengthen.

“There’s been a strong dollar-negative sentiment recently, but it’s reaching the lower band of the range,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. “There are buyers around the 94.50 level, which may prevent the currency from weakening further.”