The dollar weakened beyond $1.37 against the euro for the first time since January on bets the Federal Reserve’s plan to buy Treasuries will push down yields on U.S. assets and prompt investors to seek returns elsewhere. The U.S. currency dropped to the lowest versus Norway’s krone since October and depreciated to a two-month low against the Australian dollar as the Fed started flooding the market with greenbacks. Goldman Sachs Group Inc. raised the target on its bet against the dollar to $1.40 per euro a day after it plunged the most since the 16-nation currency’s 1999 inception. “We may end up with higher inflation down the road, and people need to buy real productive assets, which the U.S. doesn’t have,” said New York-based David Tien of Fischer Francis Trees & Watts, who helps oversee funds that were worth an estimated $22 billion in December. “The biggest winner will be commodity currencies followed by the euro.” The dollar slid 1.7 percent to $1.3701 per euro at 11:04 a.m. in New York, from $1.3474 yesterday. It touched $1.3710, the weakest level since Jan. 9. The U.S. currency dropped 2.2 percent to 94.15 yen from 96.22 after touching 93.85, the lowest since Feb. 24. The euro fell 0.7 percent to 128.77 yen after touching 130.32, the highest level since Dec. 18. The greenback may trade in “high $1.40 areas” versus the euro in the next three to six months, according to Tien, who said he won’t be surprised to see the dollar tumble 15 percent. The U.S. currency lost 10 percent in the first half of December after the Fed first brought up the prospect of “quantitative easing.” In such practice, a central bank uses injections of funds into the economy as its main policy tool. Commodity Currencies Currencies of commodity producers such as the Norwegian krone and the Australian and New Zealand dollars led the rally against the dollar today. The krone gained as much as 3.2 percent to 6.3134 per dollar, the strongest level since Oct. 15. The Australian dollar touched 69.21 U.S. cents, the highest since Jan. 12, while the kiwi dollar reached 55.73 cents, a level last seen on Jan. 14. Crude oil, Norway’s biggest export, exceeded $50 a barrel for the first time in two months, while gold was headed for the biggest gain since September. Raw materials account for 60 percent of Australia’s exports and 70 percent of New Zealand’s. Goldman Sachs raised its bet against the dollar, a trade it recommended on Feb. 19 when the dollar traded at $1.2570, according to a note sent to clients titled “Let the Printing Press Roll.” “U.S. rate differentials are turning much less dollar- supportive,” wrote Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London. Treasury Yields The yield on the 10-year Treasury note dropped 0.03 percentage point to 2.52 percent after tumbling yesterday the most since January 1962. The rate was 0.52 percentage point lower than that of the comparable-maturity German bund. The gap widened from 0.18 percentage point two days ago. The ICE’s Dollar Index slid for an eighth day, the longest stretch in a year, after the Federal Open Market Committee said yesterday it would purchase long-term Treasuries and an additional $750 billion of agency mortgage-backed securities. Citigroup is buying the euro versus the dollar after the 16-nation currency had a record gain of 3.5 percent yesterday, New York-based strategist Todd Elmer and his colleagues wrote in a research note today. “The magnitude of the Fed’s policy shift and small hints of risk-appetite normalization should be enough to sustain this dollar sell-off further,” Elmer wrote. JPMorgan Outlook The short-term target for the dollar is to depreciate to a range from $1.38 to $1.3850, a 61.8 percent retracement of its gain from December to early January, Niall O’Connor, New York- based currency technical analyst at JPMorgan Chase & Co., wrote in a research note to clients. The premium traders pay to buy call options on the euro versus the dollar over puts rose, indicating traders are the most bullish on the European currency in almost six years. A call option gives an investor the right to buy, while a put provides the right to sell. The euro’s one-month 25-delta risk-reversal rate against the dollar reached 0.9675 percent, the highest since October 2003, when Bloomberg began compiling the data. The index had a negative reading as recently as March 12. “There are so many programs to prop up the market,” said Chirag Gandhi, a money manager of a $2.5 billion fund at the investment board of the State of Wisconsin in Madison. “Risk appetite was so low and has room to rise. The dollar weakness is going to last for a while until the weakness of the global economy starts to bite again.” Demand for Safety The dollar may reassert itself as the global economy continues to shrink, prompting investors to buy the world’s reserve currency for safety, according to Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, which has $12 trillion in assets under custody. “We are not convinced yet this is going to result in sustained weakness of the dollar,” said Blake. “Quantitative easing is not something that works automatically on the economy and won’t necessarily lead to bank lending. I am not convinced recovery is here. There will be ugly data to come.” The amount wagered in long dollar positions tracked by State Street over the past six months is higher than in 82 percent of six-month periods since 1997, down from 98 percent in January, according to Blake. A long position is a bet a currency will appreciate. The Philadelphia Fed’s general economic index increased to minus 35 in March from minus 41.3 a month earlier, indicating manufacturing in the region contracted.

Source