Dollar May Extend Gains as Federal Reserve Debates Asset Sales
February 17, 2010, 5:22 PM ESTBy Ben Levisohn
Feb. 18 (Bloomberg) -- The dollar, which rose yesterday to the highest level against the yen in almost a month, may extend gains after Federal Reserve minutes showed some policy makers pushed to start selling assets in the “near future.”
The euro slid from the highest level this week versus the dollar after a political ally of Germany’s Chancellor Angela Merkel said “not a single euro” should go to Greece. The yen fell against most of its major counterparts including the Brazilian real and South African rand as signs of a U.S. economic recovery spurred demand for higher-yielding assets.
“The Fed may be undertaking asset sales sooner rather than later and that would constitute monetary tightening,” said Brian Dolan, chief currency strategist FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster New Jersey. “It translates into dollar positive news.”
The dollar traded at 91.25 yen at 7:02 a.m. in Tokyo, after advancing 1.2 percent yesterday. It reached 91.38, the highest level since Jan. 21. The euro was at $1.3602 following a decline of 1.2 percent, after climbing to $1.3788, the highest since Feb. 11. The European common currency bought 124.10 yen, little changed from 124.17.
The real was at 49.80 yen, following an advance of 1.9 percent, and the rand bought 11.98 yen, after appreciating 1.7 percent, on speculation investors will increase carry trades, in which they buy higher-yielding assets with amounts borrowed in nations with low interest rates. The benchmark of 0.1 percent in Japan has made the yen popular for funding such transactions.
Selling Assets
The Fed said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, according to minutes of the Jan. 26-27 Federal Open Market Committee meeting, released yesterday in Washington.
Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, the Fed said in the minutes. Policy makers also considered changing the statement to refer to “holdings” of mortgage-backed securities instead of “purchases.”
Futures trading on the CME Group exchange yesterday showed a 47 percent chance that the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by its September meeting, up from 46 percent odds on Feb. 16.
The dollar gained against the yen and the euro after better than forecast reports on U.S. manufacturing and housing.
‘Bullish Correction’
Builders broke ground on 591,000 homes at an annual rate last month, up 2.8 percent from a revised 575,000 in December. Starts were projected to increase to a 580,000 pace, according to the median estimate of 77 economists in a Bloomberg survey.
“Because of the U.S. economic improvement, the dollar is in a better fundamental position than the yen,” said Jessica Hoversen, a foreign-exchange and fixed-income analyst at the futures broker MF Global Ltd. in Chicago. “There’s more risk appetite, and traders are focusing on the yen as the carry currency.”
The greenback may be heading higher after the Dollar Index, which the ICE futures exchange uses to track the greenback against the currencies of six major U.S. trading partners, failed to break below its Feb. 9 bottom, United-ICAP said.
“This is a VERY bullish correction,” Walter J. Zimmermann Jr., chief technical analyst at United-ICAP in Jersey City, New Jersey, wrote in note to clients. His firm is a technical research unit of ICAP Plc, the world’s largest inter-dealer broker. “It suggests that an acceleration higher in the greenback is dead ahead.”
‘Stable-Currency Party’
The Dollar Index touched 79.559 yesterday in New York, only slightly below the level of 79.563 reached on Feb. 9, before rallying as high as 80.530.
The euro declined versus the dollar after the leader of Chancellor Merkel’s Bavarian political allies said Germany must resist supporting Greece with taxpayers’ money because granting aid would invite other nations to seek bailouts.
“We are the stable-currency party,” Horst Seehofer, who heads the Christian Social Union, one of three parties in Merkel’s coalition, told a rally in the southern city of Passau yesterday. “That’s why we’re helping Greece politically, but not a single euro must go there.”
The euro has fallen 10.2 percent against the dollar from a one-year high of $1.5144 in November on concern sovereign debt problems will hamper the region’s recovery.
The currency should be capped at $1.40 for the next decade, according to Robert Mundell, a Columbia University professor and Nobel laureate in economics for his work on exchange rates.
“They’ve paid for that overly strong euro in the past and they can’t afford it anymore,” Mundell said in a Bloomberg Television interview broadcast yesterday. “They need to put a ceiling on the euro.”
--Editors: James Holloway, Gregory Storey
To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net.
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
