The U.S. dollar is likely to remain weighed down this week by mounting expectations that the Federal Reserve will adopt new stimulus measures, and the pressures on the greenback are unlikely to ease until more details of the Fed's plans are known.
The dollar has notched broad declines in the past month, slumping in recent sessions to landmark lows against some of its rivals. The Fed is considering whether to launch a program of quantitative easing, purchasing long-term Treasury bonds to push down long-term interest rates and boost economic growth. The market equates quantitative easing with printing money, so it has a damaging effect on a country's currency.
Monetary policy and currency levels have become dominant themes across asset classes in recent weeks and are expected to play a role as finance ministers and central bankers from the Group of 20 nations convene in Seoul this week.
"What you may hear from the G-20 finance ministers meeting is some sort of attempt to calm the markets," said Carl Forcheski, director of foreign exchange at Société Générale in New York. "Some countries are getting a little bit concerned about the dollar's fall."
The dollar's slide is largely tied to a stumbling U.S. economic recovery at the same time that Europe and Asia appear to be emerging faster from hard times. But stimulus measures could inflict additional pain on the dollar, because they would keep U.S. interest rates very low, lessening the appeal of dollar-denominated assets even more.
Fed Chairman Ben Bernanke has justified U.S. central-bank measures to boost economic growth, saying inflation is running below the Fed's objective of 2% and the economy is on a course to grow too slowly to bring down unemployment.
"There would appear—all else being equal—to be a case for further action," Mr. Bernanke said Friday in a speech in Boston.
A handful of currencies touched notable highs after Mr. Bernanke spoke. The euro hit $1.4161, its highest level since January, while the Australian dollar hit parity with the U.S. dollar for the first time since 1983, when the Aussie was freely floated. The U.K. pound ticked above $1.61 for the first time since January. A day earlier, the Canadian dollar traded at parity with the greenback, for the first time since April.
Mr. Bernanke said the Fed, which meets Nov. 2-3, must proceed "with some caution," given the uncertainties about whether such easing would be successful. Until details of the Fed's approach to a second round of quantitative easing are known, the dollar is likely to stay under pressure.
In the meantime, markets will be keenly attuned to any clues on asset-purchase programs or other steps to stimulate struggling economies in the U.S. and abroad.
And as the yen trades at heights that distress Japanese authorities, investors will be watching for signals on official buying operations. Japanese Finance Minister Yoshihiko Noda kept alive the possibility of intervention to curb yen strength, saying Friday the government will take "decisive" steps if necessary.
Despite official sales of two trillion yen (US$24.6 billion) on Sept. 15 to slow the Japanese currency's appreciation, the yen has continued to move higher, with the dollar touching 15-year lows below 81 yen both Thursday and Friday.
Also on Friday, the U.S. Treasury Department put off a decision on whether to label China a "currency manipulator" until after the G-20 summit, increasing the pressure on world leaders to find a way to tamp down growing fears of a global currency conflict. A number of countries, led by the U.S., have charged that China deliberately undervalues its currency to boost its economy. The possibility of such disagreements becoming more serious and resulting in punitive trade measures is yet another negative factor hanging over the dollar, analysts said.