BLBG: Euro Drops to Four-Week Low as Greece Deadlock Spurs Vola
The dollar jumped to an almost eight-year high against the yen as traders returning from public holidays digested the latest signals on interest rates from the Federal Reserve.
The U.S. currency strengthened versus all 16 of its major peers after Fed Chair Janet Yellen said Friday it would be “appropriate” to raise rates this year if the economy improves and Vice Chairman Stanley Fischer said Monday that officials were weighing the risk of an increase. The euro dropped to its lowest level in a month against the dollar as Greek Finance Minister Yanis Varoufakis blamed creditors’ insistence on additional austerity for an impasse over the release of financial aid.
“The dominant thing is the dollar story,” said Esther Reichelt, a currency strategist at Commerzbank AG in Frankfurt. Fed policy makers “know that low rates are not without risk. They fear that if they wait too long they’ll have to hike faster in order to prevent overheating.”
The dollar climbed 0.9 percent to 122.62 yen as of 6:55 a.m. in New York, after appreciating to 122.88 yen, the strongest level since July 2007. The U.S. currency gained 0.7 percent to $1.0905 per euro, having touched $1.0885 earlier in the day.
Markets in the U.K. and U.S. reopened after being closed for holidays on Monday.
Catching Up
“Overseas traders coming back from holiday are accelerating the dollar-buying that was spurred by strengthening expectations for higher U.S. rates,” said Yuji Saito, director of foreign exchange at Credit Agricole SA in Tokyo.
U.S. central bankers are considering the risk of raising rates prematurely against having to play catch-up if they wait too long, Fed Vice Chairman Fischer said in a speech in Israel on Monday. He reiterated that the decision to increase borrowing costs for the first time since 2006 would be “data determined,” and a matter of “going from an ultra expansionary monetary policy to an extremely expansionary monetary policy.”
Greek Standoff
The dollar has gained 8.4 percent in the past six months against a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen rose 3.5 percent, while the euro fell 6.9 percent.
Greece is due to repay about 300 million euros to the International Monetary Fund on June 5. The failure to reach an agreement with lenders has seen liquidity evaporate, pushing the economy back into recession.
Price swings in the euro are becoming more pronounced amid the standoff, with implied one-month volatility against the dollar climbing to 13.97 percent Tuesday, the highest since Jan. 16. The measure was at 10.5 percent as recently as May 14, data compiled by Bloomberg show.
