Sunday, September 22, 2013

Dollar Falls to Lowest Since February as Fed Retains Stimulus

The dollar fell to its lowest level since February as markets were whipsawed by Federal Reserve communications on keeping monthly bond purchases unabated depending on the strength of the economy.


The U.S. currency fell against the majority of its 16 most-traded peers for a third-straight week as the U.S. central bank announced Sept. 18 it kept $85 billion in monthly bond purchases unchanged, compared with a Bloomberg survey forecasting a $5 billion reduction.

The dollar rose yesterday after Fed Bank of St. Louis President James Bullard said a “small tapering” was possible in October.

The euro’s rally was the most since July as the currency’s economy emerges from a record-long recession and German Chancellor Angela Merkel stands for re-election tomorrow.

“The market has really been twisted back and forth by the Fed this week,” Peter Gorra, the chief dealer in New York at BNP Paribas SA, said in a phone interview yesterday.

“With this dovish call, people really had to go to the market to put risk on, which obviously gets ugly in these volatile events.”

The Bloomberg U.S. Dollar Index, which tracks the performance of a basket of 10 leading global currencies against the dollar, fell 1 percent this week to 1,013.28 in New York. It reached 1,006.40 on Sept. 19, the lowest level on a closing basis since Feb. 20.

Market Prices

The dollar weakened 1.7 percent to $1.3524 per euro. The U.S. currency was little changed at 99.36 yen. Japan’s currency lost 1.7 percent to 134.37 versus Europe’s 17-nation common tender, touching the weakest level since November 2009.

Hedge funds and other large speculators increased bets the euro will gain against the dollar to almost the highest level since July 2011, according to data from the Commodity Futures Trading Commission.

The difference in the number of wagers by on a gain in the currency compared with those on a loss -- known as net longs -- was 31,907 on Sept. 10, compared with 12,696 a week earlier.

Currency volatility as measured by JPMorgan Chase & Co.’s G-7 Volatility Index rose to 8.94 percent after touching 8.55 percent on Sept. 18, the lowest since January.

An equally weighted basket of so-called BRICS emerging-market currencies rallied for a third week. BRICS refers to Brazil, Russia, India, China and South Africa.

While India’s central bank Governor Raghuram Rajan surprised analysts by raising the benchmark interest rate to 7.5 percent in his first policy review, the nation’s currency fell yesterday as traders reassessed Fed policy that has driven investors into higher yielding assets.

The rupee added 1.9 percent this week to 62.2775 per dollar. It’s down about 12 percent this year.

Emerging Markets

“The knee-jerk buying of emerging-markets stocks has, for now, run out of steam,” said Win Thin, the global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York. There’s “continued uncertainty about the exact timing, but, tapering still looms.”

Fed Chairman Ben S. Bernanke has orchestrated the most aggressive monetary stimulus in the central bank’s 100-year history, pumping up the balance sheet to $3.72 trillion from $867 billion in August 2007 and holding the main interest-rate target at almost to zero since December 2008.

The Fed repeated guidance that its rate target will remain low for at least as long as unemployment exceeds 6.5 percent, and the outlook for inflation remains no higher than 2.5 percent.

Markets worldwide also rallied this week after former Treasury Secretary Lawrence Summers withdrew from the running to succeed Bernanke, paving the way for Fed Vice Chairwoman Janet Yellen, who is forecast to favor slower stimulus reduction.

Fed Policy

The central bank will likely begin tapering in December as part of a process that will completely wind down quantative easing by the middle of next year, Joseph Lavorgna, chief U.S. economist in New York at Deutsche Bank Securities Inc., wrote yesterday in a note.

The central bank will likely increase its federal funds rate target in mid-2015, he said. “The economy can handle higher interest rates,” Lavorgna said. “One, yields remain extraordinarily low; two, households are anticipating higher rates, and, three, a steeper yield curve is encouraging bank lending.”

Most economists surveyed by Bloomberg now say the policy makers will begin tapering asset purchases in December. “Since we kind of had to reset our thoughts on how this was going to happen, any comment now by any Fed person will be highly scrutinized,” Fabian Eliasson, head of U.S. currency sales in New York at Mizuho Financial Group Inc., said in a phone interview.

Merkel Runs

In Europe, polls suggest the election is Merkel’s to lose, with Germans trusting her leadership, backing her austerity-first response to Europe’s debt crisis and crediting her for economic gains.

An index of household confidence in the euro zone improved to minus 14.9, the highest level since July 2011, from minus 15.6 a month earlier, the European Commission in Brussels said yesterday in a preliminary report. Economists had forecast an increase to minus 14.5, according to the median of 23 estimates in a Bloomberg News survey.

European Central Bank President Mario Draghi will address the European Parliament on Sept. 23. He has refrained from printing euros to buy bonds.

The euro has appreciated 5.4 percent this year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar appreciated 2.5 percent and the yen slumped 11.9 percent.

bloomberg.com

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