Dollar gains after World Bank cuts growth forecast

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June 22, 2009

Anonymous The Salem News Mon Jun 22, 2009, 12:43 PM EDT

NEW YORK (AP) — The dollar strengthened Monday ahead of the Federal Reserve's meeting later this week as the World Bank downgraded its assessment of the global economy, ramping up interest in the "safe" greenback.

The 16-nation euro dropped to $1.3883 in morning trading from $1.3956, while the British pound fell to $1.6400 from $1.6518.

The dollar slipped, meanwhile, to 95.88 Japanese yen from 96.19 yen.

The World Bank, which lends out money to developing countries, said in a report Sunday that the world economy will contract 2.9 percent — down from its March estimate of a 1.7 percent drop. The World Bank said then that a 1.7 percent contraction would be the worst on record.

The dollar benefited as investors turned away from stocks and commodities and bought up super-safe short-term government debt. The Dow Jones industrial average dropped 1.6 percent, while the broader The Standard & Poor's 500 index was off 2 percent in morning trading. Oil prices shed nearly $2 to below $68 a barrel.

The bulk of demand for U.S. dollars stems from the demand for U.S. bonds.

Investors are also awaiting word from the Fed, which wraps up its two-day meeting on Wednesday. The central bank is expected to keep its key federal funds rate at its current range between zero and 0.25 percent. Market watchers want to hear if the Fed will announce a plan to buy more than the original $300 billion in long-term Treasurys in order to help tamp down interest rates and keep credit flowing. Most of the Treasury purchases are due to end in August, said Ashraf Laidi, chief market strategist at CMC Markets in London.

Cutting interest rates, or leaving them at record lows, can hurt the dollar as investors seek to invest in countries whose bonds yield higher returns. Unconventional methods of increasing the money supply have also prompted some fears of inflation down the road, which could eat away at the value of the greenback.

Any sign that the Fed is curtailing its bond purchases could propel the dollar higher, Laidi said.

In other trading, the dollar rose to 1.0846 Swiss francs from 1.0797 late Friday, and gained to 1.1537 Canadian dollars from 1.1345.

The buck also rose against the Australian and New Zealand dollars, as well as the Brazilian real and Mexican peso.