Bloomberg News

Dollar Strengthens Before Federal Reserve Decision; Franc Drops

September 21, 2011

Sept. 21 (Bloomberg) -- The dollar strengthened against the majority of its most-traded counterparts amid speculation the Federal Reserve will announce further stimulus for the world’s biggest economy that won’t debase the currency.

The yen traded at almost its postwar high versus the dollar as concern the global economy is slowing stoked haven demand. New Zealand’s dollar weakened after the nation’s current account deficit widened more than forecast. The Swiss franc slid as an adviser to the central bank told Tages-Anzeiger it’s possible policy makers will tighten the cap on the currency’s strength.

“Everyone’s waiting to see what happens with the Fed,” said Mary Nicola, a currency strategist in New York at BNP Paribas SA. “What remains key is going to be what they signal for the future, if they leave the door open to more easing. It looks like a risk-off day and as a result you’re seeing the dollar do well and the yen do well.”

The U.S. currency rose versus 13 of its 16 most-traded peers. The Dollar Index, which measures the greenback against the currencies of six U.S. trading partners, gained as much as 0.5 percent before trading at 77.077 at 11:43 a.m. in New York, less than one percentage point below an almost seven-month high reached Sept. 12.

The yen rose 0.1 percent to 76.40 per dollar, after earlier reaching 76.12, the strongest since Aug. 19, when it reached a post World War II record of 75.95. The euro erased its loss against the dollar and rose as much as 0.2 percent to $1.3724.

‘Very Cautious’

“People are very cautious in not wanting to have too much long dollar exposure into the Fed decision,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy in New York at Deutsche Bank AG. “I don’t think any impact is likely to be longstanding because events in Europe absolutely trump anything the Fed is likely to do.”

Analysts are forecasting the Fed will buy longer-maturity debt and sell shorter-dated securities in its portfolio, mimicking a 1961 policy known as “Operation Twist,” in a bid to lower the cost of long-term mortgages and spark a rebound in the U.S. housing market.

“Operation Twist” would lengthen the average duration of bonds in the Fed’s portfolio while not expanding the size of its balance sheet. That differs from quantitative easing, a program in which the Fed bought $2.35 trillion since 2008 in an effort to stimulate the economy. That balance sheet expansion caused an increase of dollar supply in the market, debasing the currency.

Fed Actions

“The dollar has been undermined by quantitative easing because it has caused a huge drop in short-term yields,” said Kit Juckes, head of foreign-exchange research in London at Societe Generale SA. “This time round it could drive shorter- dated yields higher, which at the margin is likely to be dollar positive.”

The Dollar Index fell 3.9 percent from November through June, during the Fed’s last round of quantitative easing.

The Swiss franc fell versus the euro as Ernst Baltensperger, an adviser to the Swiss National Bank, said he considers it possible that policy makers will soon increase the franc ceiling versus the euro to 1.25, the newspaper reported, citing an interview.

The franc lost 0.8 percent to 1.2262 per euro after reaching 1.2327, the weakest since July 5. It fell 0.7 percent to 89.36 centimes per dollar, after touching 89.87 centimes, the weakest level since April 20.

Franc Watch

Swiss central bank spokesman Walter Meier in Zurich declined yesterday to comment when asked about speculation that policy makers may adjust the franc ceiling against the euro.

Brazil’s real fell the most among the 16 major currencies and reached its lowest level in 15 months. The currency dropped 1.9 percent to 1.8375 per dollar and touched 1.8275, the weakest level since June 2010.

New Zealand’s dollar dropped for a third straight day against the dollar after a report showed the nation’s current- account deficit was NZ$921 million ($757 million) in the second quarter, wider than the median estimate of a NZ$671 million shortfall forecast in a Bloomberg News survey of economists.

The kiwi, as the currency is known, dropped 1.2 percent to 81.40 U.S. cents.

Canada’s currency fell to parity with its U.S. counterpart as concern economic growth is slowing damped demand for riskier assets. Bank of Canada Governor Mark Carney said yesterday he may keep interest rates low beyond when full output is restored as the domestic recovery is hobbled by a weak economy in the U.S., the nation’s biggest trade partner.

The Canadian dollar weakened 0.5 percent to 99.80 cents per U.S. dollar and touched C$1.0001, the first time it traded beyond parity since Sept. 12.

Greek Update

The European Union said a second round of talks with Greek Finance Minister Evangelos Venizelos and the International Monetary Fund aimed at staving off default made “good progress.” The statement said a “full mission” will return to Athens next week.

“The fact that the negotiations are ongoing and, torturous though they may be, they probably will get their 8 billion to keep them funded in October,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “That’s making it difficult for the euro to move sharply lower near term.”

Callow advised that investors sell the currency if it gains above $1.38.

The euro has depreciated 1.4 percent in the past month among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has appreciated 4.4 percent while the yen has gained 4.5 percent.

‘Old Safe-Haven’

The yen rose to as high as 76.12 per dollar after breaking through so-called resistance near 76.35, according to Junichi Ishikawa, a Tokyo-based market analyst at IG Markets Securities Ltd.

Japanese Finance Minister Jun Azumi told reporters in Tokyo today he’s closely watching markets and will take “bold” action on currencies if needed.

The pound slid versus most of its major peers after minutes of the Bank of England’s most-recent meeting showed policy makers said growth in the second half of 2011 may be “materially weaker” than projected in August. The central bank kept its key rate at a record low of 0.5 percent in September and left bond purchases at 200 billion pounds ($314 billion).

The pound fell 0.7 percent to $1.5626 after reaching $1.5614, the weakest since Jan. 12. It was 0.9 percent weaker at 87.84 pence per euro, snapping a three-day advance.

Norway’s krone weakened versus all but one of its 16 major peers as Norges Bank kept its benchmark rate unchanged at 2.25 percent for a third consecutive meeting, saying the rate is likely to remain low for a longer period than previously expected. The krone lost 0.7 percent to 5.6669 per dollar.

--Editors: Paul Cox, Greg Storey

%USD %NZD %CHF

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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