BLBG: Dollar Trades Near 8-Month Low on Prospects of More Fed Easing
The dollar traded near an eight- month low against the euro on speculation that Federal Reserve policy makers will this week signal their willingness to buy more government debt to support economic growth.
The dollar touched a 15-year low versus the yen before tomorrow’s release of minutes from the Fed’s Sept. 21 policy meeting. The euro pared earlier gains against the U.S. currency after the weekend’s International Monetary Fund meeting failed to narrow differences over currencies.
“Given there was little suggestion of coordination or cooperation at the IMF meeting, the fact that the euro hasn’t continued to go higher on the back of that suggests caution,” said Ian Stannard, a senior currency strategist at BNP Paribas SA in London. “The euro may be a little overextended and we may see a little bit of a correction set in from these levels.”
The U.S. currency was little changed at $1.3940 per euro as of 11:08 a.m. in London, from $1.3939 in New York on Oct. 8. It fell to $1.4012 earlier today and reached $1.4029 on Oct. 7, the weakest since Jan. 28. The dollar traded at 82.03 yen, from 81.93 yen last week, after earlier reaching 81.39 yen, the lowest level since April 1995. The euro advanced to 114.35 yen, from 114.19 yen.
Australia’s currency fell 0.1 percent to 98.39 U.S. cents. The so-called Aussie strengthened to 99.07 U.S. cents earlier after home-loan approvals climbed for a second-straight month. It reached a record 99.18 cents on Oct. 7, the highest level since it began trading freely in 1983.
U.S. Data, Fed
The Australian dollar erased an earlier advance after China raised the deposit reserve ratio for six banks by 50 basis points. Financial markets in Japan and the U.S. are closed for public holidays today.
The Aussie “dropped from the overnight high with the rate announcement from China depressing demand,” analysts at Lloyds Banking Group Plc, led by Kenneth Broux in London, wrote in an e-mailed report.
U.S. employers cut payrolls by 95,000 workers in September after a revised 57,000 decrease in August, Labor Department figures in Washington showed on Oct. 8. The median forecast of 87 economists surveyed by Bloomberg News called for a 5,000 drop. The unemployment rate unexpectedly held at 9.6 percent.
Fed Chairman Ben S. Bernanke said on Oct. 4 that the central bank’s first round of large-scale asset purchases aided the economy and that further quantitative easing, or QE, is likely to help more. New York Fed President William Dudley, who has voiced support for more government bond purchases, will speak in Washington later today.
DBS Cuts Forecasts
“Since August, the Fed has been leaning towards more quantitative easing measures to underpin the weakened U.S. recovery,” Philip Wee, a senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note today. “We have downgraded the outlook for the dollar.”
DBS lowered its year-end forecast for the dollar to trade at $1.40 per euro from $1.28 previously, and to be at 83 yen from 88 yen before, according to the note.
“Risk-taking appetite may be positive, given higher equities and commodities,” said Yusuke Tanaka, a senior dealer at Mitsubishi UFJ Trust & Banking Corp. in Singapore. “This is probably a plus for the euro.”
Commodity Futures Trading Commission data show hedge funds and other large speculators are more bearish on the dollar than at any time in history, with bets on a decline exceeding those on a rise by 341,683 contracts as of Oct. 5.
‘Pain Trade’
The last two times sentiment was close to this level, in early 2008 and late 2009, the dollar rallied. The Dollar Index, which tracks the U.S. currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, surged as much as 24 percent in the second half of 2008 and 19.6 percent between November 2009 and June 2010.
“The pain trade now is any dollar-positive, or very likely U.S. bond-market-negative, news,” Citigroup Inc. strategists led by Steven Englander in New York wrote in an Oct. 7 report. The strategists said they are still calling for dollar weakness.
Europe’s common currency was at 1.3422 Swiss francs, from 1.3419 francs on Oct. 8, when it reached 1.3494 francs, the strongest level since Aug. 13.
Gains in the yen were tempered on speculation that Japan will intervene to stem the appreciation of its currency.
Japanese Finance Minister Yoshihiko Noda said on Oct. 8 Group of Seven officials understand Japan’s position on the yen’s gains and agreed that excessive foreign-exchange movements are undesirable.
‘No Official Criticism’
“There was no official criticism of Japan’s decision to intervene in the foreign-exchange market by selling yen,” said Gareth Berry, a currency strategist at UBS AG in Singapore. “This increases the chance of a further round of intervention should the yen continue to appreciate.”
At the IMF’s annual meeting in Washington, governments tasked the agency with calming the recent outbreak of tensions over currencies amid signs they are already triggering a protectionist backlash. Officials including U.S. Treasury Secretary Timothy F. Geithner and Egyptian Finance Minister Youssef Boutros-Ghali said Oct. 10 the lender should outline how countries can expand their economies without damaging those of other nations.
Australia’s dollar strengthened earlier today versus its U.S. counterpart on prospects the nation’s central bank will raise its benchmark interest rate next month.
‘More Stimulus’
Australian home-loan approvals rose 1 percent in August from a month earlier, the statistics bureau said today, matching the median estimate of economists surveyed by Bloomberg News.
“The market is very keen to take the Aussie higher,” said Khoon Goh, head of market economics at ANZ National Bank Ltd. in Wellington. “The rhetoric is certainly pointing toward providing more stimulus for the U.S. economy and that’s why the market is pricing in a decent probability of QE2, putting the U.S. dollar under downward pressure.”
Benchmark interest rates are 4.5 percent in Australia and 3 percent in New Zealand, compared with as low as zero in Japan and the U.S., attracting investors to the South Pacific nations’ assets. The risk in such trades is that currency market moves will erase profits.
To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
