BLBG: Dollar Falls to Lowest Level Since January as Volatility Drops
The dollar dropped to the lowest level versus the euro since January as falling currency and stock volatility and signs of thawed credit markets 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 greenback as crude oil prices rose above $60 a barrel, encouraging demand for currencies of commodity producers.
“The dollar is the anti-risk currency,” said Warren Hyland, a money manager in London at Schroder Investment Management Ltd., which helps oversee $204 billion in assets. “Now we are transitioning into risk-taking environment, and you have this structural change of capital flows, which is moving into emerging markets.”
The euro advanced 1 percent to $1.3761 at 12:21 p.m. in New York, from $1.3630 yesterday. It earlier touched $1.3795, the highest level since Jan. 8. The yen appreciated 0.9 percent to 95.09 per dollar from 95.97. The euro increased 0.1 percent to 130.96 yen from 130.81.
South Africa’s rand and Brazil’s real led a gain against the dollar among emerging-market currencies on increased demand for assets in developing countries. The rand rose as much as 1.9 percent to 8.2924 while the real advanced as much as 1.3 percent to 2.0135, the strongest level since Oct. 3.
Hyland is holding commodity-linked currencies, such as the Australian and New Zealand dollars, and some emerging-market currencies, including the real and Poland’s zloty.
Dollar Index
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 1.2 percent to 81.129, the lowest level since Jan. 2, on reduced demand for safety.
The greenback 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.
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 a trade goes against them.
‘Pretty Powerful’
“It just exploded,” said Andrew Chaveriat, a New York- based technical analyst at BNP Paribas. “It seems to be a pretty powerful rise.”
The euro may test resistance “in the next few days” at $1.3915, the upper bound of the trend channel defining the currency’s rally since April, according to Chaveriat.
Trend channels are patterns traders draw on charts based on a currency’s highs and lows and define a path within which gains and declines occur.
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 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 0.7 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 as much as 0.8 percent to 78.09 U.S. cents, the highest level since Oct. 3.
Dollar and Oil
ICE’s Dollar Index and crude oil have a correlation of minus 0.61 in the past two months, compared with minus 0.26 since the start of the year, based on the percentage moves of the two, according to data compiled by Bloomberg News. A reading of 1 indicates the two moved in lockstep, while minus 1 indicates they always went in the opposite direction.
“The bears are throwing in the towel,” said Paresh Upadhyaya, a senior vice president at Putnam Investments LLC in Boston, who helped manage $21 billion in currency assets as of the end of March. “There’s still a lot of money -- whether it’s in money markets or somewhat defensive positions in portfolios -- that is just waiting for pullbacks to either reduce their defensive holdings or now start to look to go long.” Upadhyaya said he bought the Australian dollar and the Norwegian krone.
Sterling advanced as much as 1.5 percent to $1.5709, the highest level since Dec. 17, as lower Libor rates signaled credit markets are thawing.
The yen, which dropped against all of its 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.
