The greenback is down against major currencies as the Fed and Treasury announce a plan to lend billions in an attempt to backstop consumer debt.
The dollar lost ground against the 15-nation euro, which rose 1.1 cents to $1.306 from $1.295 late Monday. The dollar slipped against the British pound, which rose 3.4 cents to $1.552 from $1.518 late Monday.
Meanwhile, the greenback fell ¥1.74 to ¥95.62 against the Japanese yen.
The Fed’s announcement sparked a morning rally, and stocks churned Tuesday afternoon before the Dow Jones industrial average (INDU ( INDU ))extended its winning streak to three days with a 38-point gain. The Standard & Poor’s 500 (SPX ( SPX )) ended up and the Nasdaq composite (COMP ( COMP )) ended down.
The relationship between the stock market and the currency markets has been especially strong since Lehman Brothers ( LEHMQ ) failed in mid-September, according to Ashraf Laidi, chief currency analyst at CMC Markets in New York. As the stock market has fallen, the dollar has gained strength.
Laidi believes the recent trend in which investors seek the stability of the dollar in a tough market will continue.
“Textbook economics are having much less of an impact on currency markets,” he said.
Laidi believes the government’s plan to boost lending is the main reason behind the dollar’s movement Tuesday.
Under the new government plan, the Federal Reserve Bank of New York will lend up to $200 billion to holders’ securities backed by consumer debt, such as credit card debt. Treasury will allocate $20 billion to back that lending by the New York Fed.
In addition, the Federal Reserve, the nation’s central bank, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae ( FNM , Fortune 500 ), Freddie Mac ( FRE , Fortune 500 ), and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
On Tuesday, reports showed the gross domestic product shrank, home prices plunged and consumer confidence rebounded from an all-time low.
GDP posted its biggest drop in seven years on Tuesday, declining 0.5% in the three months ending Sept. 30, according to the Commerce Department. This was in line with estimates from economists surveyed by Briefing.com.
Home prices fell at a 16.6% decline in the third quarter compared with the same period a year ago, according the S&P Case-Shiller Home Price Index. That eclipsed the previous record of 15.1% set during the second quarter.
Consumer confidence rebounded in November to 44.9 after hitting an all-time low of 38 in October.