The Dollar Index fell by the most since the first quarter of2011 after the European Central Bank pledged to protect the eurofrom unraveling and the Federal Reserve committed to reduceunemployment via open-ended debt buying, which may debase the U.S.currency.

Since July 26, when ECB President Mario Draghi said he would do“whatever it takes” to save the euro, the 17-nation currency roseversus 15 of its 16 most-traded counterparts tracked by Bloomberg.Amid the Fed's expansion of monetary stimulus, the Dollar Indexlost 2.1 percent in the third quarter. The Bank of Japan, whichfollowed the Fed and the ECB in expanding its balance sheet by 10trillion yen ($130 billion), is scheduled to announce its nextpolicy decision on Oct. 5.

“The ECB announcement to buy one- to three-year bonds in theperiphery” shaped currency markets last quarter, George Davis,chief technical analyst for fixed income and currency strategy inToronto at Royal Bank of Canada, said in an interview. “It was theopening of a new chapter.”

The dollar fell 1.5 percent during the past three months to$1.2866 in New York and touched $1.3172 on Sept. 17, the leastsince May. The common currency weakened 0.8 percent to 100.21 yen.The dollar lost 2.3 percent to 77.96 yen.

Sweden's krona appreciated more than all of its major peersversus the dollar this quarter, gaining 5.4 percent. The SouthAfrican rand had the biggest quarterly decline, slipping 1.8percent versus the greenback

Brazil's real has lost 7.9 percent versus the dollar in 2012,almost three times the decline of the rand, the second-biggestloser. The Mexican peso leads all 16 of the dollar's biggest peerswith a gain of 8.4 percent this year.

The New Zealand dollar led all major currencies this monthagainst the greenback, appreciating 3.3 percent. The real increasedthe least out of 16 counterparts versus the dollar, gaining 0.2percent.

The euro has fallen 0.7 percent during the past three monthsagainst a basket of nine other developed-market currencies,including the yen, pound and Australian dollar, according toBloomberg Correlation-Weighted Indexes. Japan's currency hasdeclined 2.2 percent and the greenback has lost 4.3 percent, themost.

Bond Buying

Spain's cabinet produced its fifth austerity budget Sept. 27amid speculation the nation will join Ireland, Greece and Portugalin requiring a financial bailout. It announced Friday its bankshave a capital deficit of 59.3 billion euros ($76.3 billion), lessthan previously estimated, according to a test designed to liftdoubts about a financial industry hit by real estate losses.

The ECB said it may buy bonds with maturities as long as threeyears. Europe's central bank said it planned to sterilize its bondspurchases, taking out as much liquidity as it injects, while theFed announced unsterilized debt purchases, which increase thenation's money supply.

Frustrated by the slow pace of the U.S. recovery, Fed ChairmanBen S. Bernanke announced Sept. 13 that the central bank wouldlikely keep rates at a record low and purchase $40 billion ofmortgage bonds per month in a third round of so called quantitativeeasing, or QE3, until the jobs market shows “sustainedimprovement.” The Fed is mandated to maintain price stability andfull employment.

Intercontinental Exchange Inc.'s Dollar Index, tracking thegreenback against six major U.S. trading partners, declined to78.601 on Sept. 14, the lowest since February.

“The Fed's action to take their dual mandate that much moreseriously in pursuit of additional measures was enormous,” AlanRuskin, global head of Group-of-10 foreign-exchange strategy atDeutsche Bank AG in New York, said in a telephone interview. “Itwas one of the more substantive moves I've seen from the Fed in thelast 30 years.”

Expansion of America's gross domestic product is forecast toslow to 2.1 percent in 2013 from 2.2 percent this year, accordingto the median estimate of economists surveyed by Bloomberg. Theunemployment rate dropped to 8.1 percent in August as Americansexited the workforce. The rate hasn't been less than 8 percentsince January 2009.

'Tail Risk'

“With Europe, we get talk about removing tail risks,” orpotential crisis, Noel Hebert, chief investment officer atBethlehem, Pennsylvania-based Concannon Wealth Management LLC,which oversees about $250 million, said in a telephone interview.“Bernanke actually opened up the pocket book again. He's activelyexpanding the money supply, debasing the currency.”

Growing risk for Japan's economy to shrink this quarter and thefailure of central bank loosening to dislodge deflation mayincrease pressure for officials to ease at either of two meetingsnext month.

Signs that a global slowdown is undermining a Japanese recoveryprompted the central bank to unexpectedly expand its asset-purchasefund this month. BOJ Governor Masaaki Shirakawa and his colleaguesgather to set policy twice next month, on Oct. 4-5 and Oct. 30,with Deputy Governor Hirohide Yamaguchi saying last week that thebank will take “bold steps” if necessary.

“The growth data is disconcertingly weak,” Deutsche's Ruskinsaid. “Even the Bank of Japan tried to surprise” markets throughfurther easing, he said.

China is scheduled to release its manufacturing purchasingmanagers index tomorrow, with economists surveyed by Bloomberg Newspredicting a reading of 50, the level that divides contraction fromexpansion. Fitch Ratings lowered its forecast for growth in Chinathis year, citing a “deteriorating global growth outlook.” Thecredit rating company predicts China's economy will expand 7.8percent, compared with an earlier estimate of 8 percent.

The yuan strengthened 1.1 percent this quarter to 6.2847 perdollar.

Bloomberg News

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