MW: Dollar gains as investors lose appetite for risk
Traders unwinding short positions in U.S. unit before Fed minutes
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar gained ground Tuesday, edging up for a third day against the euro from an eight-month low, as reports of policy tightening in China and ongoing credit problems in Ireland and Greece boosted the greenback’s appeal.
Traders also reversed bets placed against the dollar ahead of the release of minutes from the Federal Reserve’s September meeting on U.S. monetary policy.
The minutes, scheduled for release at 2 p.m. Eastern time, will be watched for an indication of how close the policy-setting Federal Open Market Committee is to implementing an additional round of quantitative easing, potentially when it next meets in early November.
The dollar index (DXY 77.72, +0.28, +0.36%) , a measure of the U.S. unit against a basket of six major currencies, rose for a second day, reaching 77.606 from 77.513 late Monday.
The euro (EURUSD 1.3812, -0.0059, -0.4254%) slipped to $1.3843 from $1.3880 in late North American trading on Monday. See more tools and data on currency trading.
The British pound (GBPUSD 1.5808, -0.0067, -0.4220%) fell to $1.5839, down from $1.5877, after a report on U.K. consumer price inflation. See more on British inflation data and prospects for quantitative easing by the Bank of England.
Weighing on the euro were reports concerning worries of bondholders in two of Ireland’s nationalized banks. The cost to insure Irish debt widened, one sign that Europe’s sovereign debt problems, which monopolized the attention of financial markets this spring, haven’t disappeared, analysts said. Read more from MarketWatdh about Ireland’s banks, credit default swaps.
The main reason that the euro has gained more than 8% since the end of August are increasing perceptions that the U.S. central bank is likely to restart a bond-purchase program to buoy the economy. But quantitative easing — in which a central bank effectively create new money via reserves that are used to purchase assets — devalues a country’s currency.
The Fed’s September policy statement was taken as a sign that more bond buying was on the way if the economy didn’t improve — and U.S. data, on the whole, have been uninspiring.
“With currency markets having priced the possibility of more than $1 trillion of additional easing from the Fed, any moderation of that plan will continue to prove dollar positive as late bears scramble to cover [short dollar positions],” said Boris Schlossberg, director of currency research at GFT.
Strategists at UniCredit Bank said Monday remarks by Janet Yellen, the Fed’s newly installed vice chair, tying loose monetary conditions to excessive risk-taking made currency investors cautious, allowing the dollar to recover slightly ahead of the release of the minutes. Read about Yellen's remarks.
But Steve Barrow, foreign-exchange and fixed-income strategist at Standard Bank, said her remarks likely don’t indicate Yellen would resist a further round of quantitative easing if the issue is debated at the Fed’s November meeting.
“Yellen has a history as a dove and we don’t think she is likely to change because she has come back to the Fed board,” Barrow said.
