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Forex - Dollar softens as market brushes off Fed policy criticism

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Forexpros - The dollar fell against most major currencies on Wednesday, erasing earlier gains after profit takers sold the unit and dismissed comments from a Federal Reserve governor who criticized U.S. monetary policy.

In Asian trading on Wednesday, EUR/USD was up 0.05% at 1.2906.

Earlier, Federal Reserve Bank of Philadelphia President Charles Plosser, a noted inflation hawk, said a decision to roll out a third round of quantitative easing to encourage investing and hiring won't work in that households and businesses would rather pay down debts than take on new leverage.

Quantitative easing functions via pumping liquidity into the financial system in a way that pushes down interest rates across the economy to encourage borrowing, weakening the dollar as a side effect.

"And as far as households are concerned, they continue to try to repair their balance sheets in the wake of substantial losses of housing wealth, as I indicated earlier. They are deleveraging and saving more. It seems unlikely that a small drop in interest rates will overturn the strong desire to save and, instead, induce households to spend more," Plosser said in a speech earlier, according to prepared remarks from his presentation.

"Thus, in my view, we are unlikely to see much benefit to growth or to employment from further asset purchases. If I am right, then conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility," Plosser added.

"This is quite costly: If the public loses confidence in the central bank, our ability to set effective monetary policy in the future will be harmed and households and businesses will feel the consequences."

Bullish U.S. housing data sent the dollar rising to the point of profit taking as well.

The Standard & Poor’s/Case Shiller House Price Index showed that home price in 20 cities rose 1.2% in July of this year compared with the same month a year ago.

Analysts had expected the closely watched gauge on home prices to rise 1.0% in July.

Elsewhere, the Conference Board, an industry group, reported that its consumer confidence index rose to 70.3 in September from an upwardly revised 61.3 in August.

September's reading was the highest since February and outpacing analysts' calls for a 63.0 reading.

The euro and other higher-yielding currencies saw support on news that German Finance Minister Wolfgang Schauble said European policymakers should do everything in their power to protect the single currency, pointing out that defending the euro was "worth any effort."

The greenback, meanwhile, was down against the pound, with GBP/USD trading up 0.08% at 1.6200.

The dollar was down against the yen, with USD/JPY trading down 0.01% at 77.79, and up against the Swiss franc, with USD/CHF trading up 0.01% at 0.9375.

The dollar was up against its cousins in Canada, Australia and New Zealand, with USD/CAD trading up 0.01% at 0.9806, AUD/USD down 0.23% at 1.0368 and NZD/USD trading down 0.21% at 0.8199.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.03% at 79.72.

Later Wednesday in the U.S., official data on new home sales will publish as will the government's latest data on crude oil stockpiles.

8.10.12 04:38

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