U.K. pound advances after report on deficit-cutting measures
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar extended a decline against the euro and other major currencies Wednesday, falling to a 15-year low against the Japanese yen and giving back most of the gains logged in the previous session as China’s central bank moved to tighten monetary policy.
Adjustment of trading positions came before the U.S. Federal Reserve releases its compilation of economic anecdotes, known as the Beige Book.
The dollar index (DXY 77.18, -1.00, -1.28%) , a measure of the U.S. unit against a basket of major global currencies, fell to 77.122 from 78.041 late Tuesday.
The euro (EURUSD 1.3959, +0.0229, +1.6679%) rose to $1.3975 from $1.3733 in late New York trading Tuesday. On Tuesday, the euro dropped 1.3%, its worst day since late August, according to FactSet Research. See more currency data and tools.
Against the Japanese yen, the dollar (USDYEN 81.0400, -0.5600, -0.6862%) fell to ¥81.07 from ¥81.51 late Tuesday. The greenback fell as low as ¥80.82. If it breaks through that 15-year low, it will be at the lowest level since the yen was allowed to float freely in the 1970s.
The yen will keep rallying as long as U.S. Treasury yields fall faster than Japanese bond yields, said strategists at Brown Brothers Harriman. See story on Treasury yields.
U.S. stocks extended gains, recouping more than half of the previous session’s drop.
More concern about how the Fed will structure a second round of quantitative easing also weighed on the U.S. currency, analysts said.
“The firmer Wall Street open has weighed on the greenback, while talk of more ‘open-ended’ QE2 has perhaps weighed,” said analysts at Action Economics.
The Beige Book, due for release at 2 p.m. Eastern time, will be considered by Federal Reserve policy makers at their next meeting on Nov. 2 and 3.
The report “will most likely show that the recovery is losing steam,” said Kathy Lien, director of currency research at GFT. “There is a 90% chance that the Beige Book report will confirm everyone’s fears that the U.S. recovery has hit a brick wall, and this possibility has encouraged traders to sell dollars once again.”
On Tuesday, investors returned to a familiar pattern of selling assets considered riskier: stocks and commodities. That left currency traders to reverse short positions against the dollar, which are bets that the greenback would fall more. Read about Tuesday’s dollar, China news.
The knee-jerk reaction to the People’s Bank of China rate hike stemmed from fears that tighter policy signaled slower economic expansion for China, with worrisome implications for global growth.
But the dollar, under heavy pressure over recent weeks, quickly gave back part of the China-inspired bounce.
Analysts said there’s a strong temptation to buy high-yielding currencies on dips, but they warned that short positions have been building up heavily against the dollar, which could mean the greenback’s short-covering bounce could have further to run in the near term.
“If the overwhelming desire ... is to buy ‘yieldy’ currencies on this dip, then what makes people hold back is the knowledge that the ‘short dollar’ trade is pretty crowded already,” said Kit Juckes, head of foreign-exchange strategy at Societe Generale
“So caution about when to step back in seems advised,” Juckes wrote in a note to clients.
U.K. fiscal, monetary policy
The British pound (GBPUSD 1.5854, +0.0159, +1.0131%) extended gains, to buy $1.5856, up from $1.5699 Tuesday, after George Osborne, British chancellor of the exchequer, confirmed that the country will stick to its timetable for massive government-spending cuts. Read about U.K. spending cuts.
“The majority of their deficit reductions are coming from spending cuts,” said Andrew Busch, global currency strategist at BMO Capital Markets. “This is the best mix for future economic growth.”
Earlier, the minutes from the Bank of England’s October Monetary Policy Committee meeting confirmed expectations that officials were split three ways on what to do about interest rates and so-called quantitative easing. Read about Bank of England minutes.
