BLBG: Dollar Falls to Lowest Level Since January on Volatility Drop
The dollar declined to the lowest level versus the euro since January as falling currency and stock volatility spurred speculation investors will seek higher- yielding assets.
The U.S. currency’s decline accelerated after weakening beyond the level where it traded in March after the Federal Reserve announced its plan to buy up to $300 billion in Treasuries. New Zealand’s and Canada’s dollars gained versus the U.S. currency as crude oil prices rose above $60 a barrel, encouraging demand for currencies of commodity producers.
“Things are normalizing,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “The broad dollar weakness is at play.”
The euro advanced 1.1 percent to $1.3777 at 10:38 a.m. in New York, from $1.3630 yesterday. It earlier touched $1.3795, the highest level since Jan. 8. The yen appreciated 0.7 percent to 95.32 per dollar from 95.97. The euro increased 0.4 percent to 131.34 yen from 130.81.
The Dollar Index, used by Intercontinental Exchange Inc. to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped as much as 1.1 percent to 81.181, the lowest level since Jan. 2, on reduced demand for safety.
The dollar dropped a record 3.4 percent versus the euro on March 18, when the Fed announced its plan to buy U.S. government debt to keep interest rates low and stimulate the economy, a measure known as quantitative easing.
Taking Out ‘Stops’
The U.S. currency extended its decline today after taking out “stops” at $1.3739, a level last reached on March 19, said Alan Ruskin, head of international currency strategy in North America at RBS Securities Inc. in Greenwich, Connecticut. Traders place stops, or pre-set orders to buy or sell a security, to protect their positions in case the trade goes against them.
Implied volatility on major currencies, which reflects investors’ expectations of currency swings, fell to 13.77 percent, from 13.83 yesterday, according to data compiled by JPMorgan Chase & Co. The gauge was at 17.22 percent at the end of March. A drop in volatility tends to signal reduced demand for options to protect investors from wild currency swings.
“We’ve seen in recent days that euro-dollar is still being driven by risk aversion,” said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany’s second- biggest lender. “It’s of course calming for many investors when volatility falls.”
Stock Volatility
The VIX, as the Chicago Board Options Exchange Volatility Index is known, and Europe’s VStoxx Index have both retreated to their lowest levels since Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed the biggest bankruptcy in U.S. history. The Standard & Poor’s 500 Index added 1.8 percent.
The London interbank offered rate, or Libor, for three- month dollar loans decreased 0.04 percentage point to 0.72 percent, bringing its drop over the past four days to almost 0.14 percentage point, according to the British Bankers’ Association. The rate was 1.43 percent at the end of 2008.
Canada’s dollar advanced to C$1.1400 per U.S. dollar, the strongest level since October, as crude oil for July delivery rose as much as 4.2 percent to $62.14 a barrel on the New York Mercantile Exchange. Raw materials such as crude oil and gold make up more than half of Canada’s export revenue.
The New Zealand dollar rose 1.3 percent to 60.92 U.S. cents, extending this month’s gain to 8 percent. The Australian dollar increased 0.5 percent to 77.87 U.S. cents, the strongest level since October.
Pound’s Gain
Sterling advanced as much as 1.2 percent to $1.5656, the highest level since Dec. 17, as lower Libor rates signaled credit markets are thawing.
The yen, which dropped against all of the 16 most actively traded counterparts this year, may weaken further as deflation makes it more difficult for Japan to reduce its debt, Bank of Tokyo-Mitsubishi UFJ Ltd. said.
“Yields in Japan will remain extraordinarily low,” Derek Halpenny, European head of global currency research in London at Bank of Tokyo, wrote in a report today. “Japan’s ability to tackle its growing debt mountain is diminishing. And with deflation still persisting, this debt is growing in real terms. With further dollar depreciation ahead over the coming months, the yen remains vulnerable to the downside against non-dollar currencies.”
