BLBG:Dollar Drops to 4-Month Low Versus Euro Before Fed Meets
The dollar dropped to a four-month low against the euro before the Federal Reserve starts a two-day policy meeting today amid speculation it will decide to buy bonds to boost the economy.
The U.S. currency weakened versus most of its 16 major counterparts following a decline yesterday after Moody’s Investors Service said the country’s Aaa rating may be cut if it doesn’t reduce its ratio of debt to gross domestic product. The euro was near a two-month high against the yen before Germany’s Federal Constitutional Court issues its ruling today on the country’s participation in Europe’s bailout fund.
“The market is discounting another tranche of money printing from the Fed,” said Derek Mumford, a Sydney-based director at Rochford Capital, a currency risk-management company. “That would be negative for the dollar.”
The dollar slid 0.1 percent to $1.2867 per euro at 6:55 a.m. in London after touching $1.2883, the lowest since May 14. The euro rose 0.3 percent to 100.23 yen. It reached 100.43 on Sept. 7, the strongest level since July 4. The yen slid 0.2 percent to 77.90 per dollar.
The MSCI Asia Pacific Index (MXAP) of shares gained 1 percent, sapping demand for the Japanese and U.S. currencies as a haven.
The Fed bought $2.3 trillion of securities from 2008 to 2011 in two rounds of so-called quantitative easing. In an Aug. 31 speech, Fed Chairman Ben S. Bernanke said weak hiring and unemployment exceeding 8 percent posed a “grave concern” and that bond purchases are a policy option.
Rating Warning
“Quantitative easing has been 60 to 70 percent priced-in in the market,” said Masato Yanagiya, head of foreign-exchange and money trading in New York at Sumitomo Mitsui Banking Corp.
Moody’s, which placed a negative outlook on the U.S.’s Aaa grade in August 2011, said in a statement yesterday that the rating would probably be cut to Aa1 if no policy is passed to address a mounting debt to GDP ratio.
The euro gained 3 percent in the past month, the best performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar slid 2.1 percent, while the yen fell 1.6 percent.
Germany is the only country that hasn’t ratified the European Stability Mechanism, a 500 billion-euro ($643 billion) fund that offers loans to euro-zone members and may buy their bonds to lower borrowing costs. If today’s court ruling means it can’t join, the mechanism won’t be created and other bailout measures might be thrown into doubt.
Dutch Election
Dutch voters elect a new parliament today, with a TNS NIPO poll showing yesterday that the opposition Labor Party would take 34 seats, while Prime Minister Mark Rutte’s Liberal Party would win 35.
Results matching the polls may yield a return of the grand coalition that governed for eight years until 2002, making unlikely a shift in direction in Dutch backing for German Chancellor Angela Merkel’s austerity-first approach toward the euro-area financial crisis.
“The most likely outcome is that the Court rules the ESM legal but also imposes conditions on its future use,” Jennifer McKeown, a senior European economist at Capital Economics Ltd. in London, wrote in a research note today. A Liberal-Labor coalition in the Netherlands “would stick to planned austerity measures” and “also support further bail-outs for peripheral euro-zone governments, albeit with very strict fiscal conditions,” she wrote.
Euro-Yen
The euro may decline toward a one-month low against the yen should it fail to break through the so-called neckline on a head-and-shoulders chart, according to Gaitame.com Research Institute Ltd.
The head of the chart was the March 21 high with the Feb. 27 and April 20 peaks as shoulders, said Takuya Kawabata, a researcher at Gaitame.com. The neck-line, running through the interim lows of March 6 and April 16, is at 100.87 today, data compiled by Bloomberg show.
“The euro is trying to break above the neck-line, but failure to do so is likely to result in a drop,” said Kawabata in Tokyo. “If it happens, I expect the euro to slide toward the June 1 low to form an inverse head-and-shoulders pattern.”
The inverse pattern would have the June 1 low as a shoulder and the July 24 low as a head, he said. A decline to the June 1 level of 95.60 would be the lowest since Aug. 3.
To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
