Bloomberg News

Dollar Slumps as Fed Minutes Show ‘Considerable Uncertainty’

October 12, 2011

Oct. 12 (Bloomberg) -- The dollar fell to a three week low against the euro as minutes from the last Federal Reserve meeting showed some policy makers saw “considerable uncertainty” that U.S. economic growth will pick up.

The euro reached a one-month high versus the yen as European Commission President Jose Barroso called for a “coordinated approach” to recapitalize the region’s banks. New Zealand’s dollar rose the most in two months against the dollar as stocks and commodities advanced, buoying higher-yielding currencies, and the yen sank against all its major counterparts.

“The U.S. outlook is still contentious; if Europe is making progress in the right direction, then the U.S. is making progress in the wrong direction,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital unit in Toronto. “Now that we have the right people seeming to talk about the right things in the right way in the European Union, we’re seeing the market has just gone nuts.”

The dollar depreciated 1.1 percent to $1.3791 versus the euro at 5 p.m. New York time, after earlier touching $1.3834, the weakest level since Sept. 16. The 17-nation currency gained 1.9 percent to 106.56 yen after reaching 107.05 yen, the most since Sept. 9. The dollar rose 0.8 percent to 77.26 yen, after touching 77.49, the highest level since Sept. 12.

Capital Buffers

Barroso urged a “coordinated approach” to deliver a “significantly higher capital ratio of highest quality capital” for banks, while offering government funds only as a last resort. Banks that require aid would be barred from paying dividends or bonuses.

Banks may be required to maintain a 9 percent capital buffer to absorb sovereign risks, up from the 5 percent core capital level used in July’s stress tests, according to a person familiar with discussions at the European Union’s top banking regulator.

Slovak parties reached an agreement to approve Europe’s enhanced bailout fund, paving the way for a vote this week.

“The market is taking each proposal as a step towards getting out of the European crisis, however, it will likely have to get a lot worse before there is greater consensus on what needs to be done. said Aroop Chatterjee, a currency strategist at Barclays Plc in New York. “Until then we remain cautious and see politicians as being behind the curve. If the euro hovers around here there will be less urgency from European politicians.”

Fed Minutes

The Fed said some officials at its Sept. 20-21 meeting wanted to keep further asset purchases as an option to boost the economy as policy makers saw “considerable uncertainty” that U.S. growth will pick up. The debate culminated in the central bank’s decision to replace $400 billion of Treasuries in the central bank’s portfolio with longer-term debt to reduce borrowing costs, a policy known as Operation Twist.

“ While a couple of different tools were considered and debated overall the outlook is consistent with a gradual and painfully slow recovery in the economy,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc. “I would be a seller of euro at these levels, there may be some near-term upside as this optimism plays out, but I don’t see these gains as sustainable.”

The Dollar Index, which tracks the U.S. currency against those of six U.S. trading partners, slid 0.8 percent to 77.026. It earlier reached 76.796, the lowest since Sept. 21.

Stocks Rally

The Standard & Poor’s 500 Index climbed 1 percent. Government bonds declined, with Germany’s 10-year bund falling for a sixth straight day, pushing the yield on the securities up 10 points to the highest level since Aug. 31. The U.S. Treasury 30-year bond yield climbed as much as 15 basis points to 3.25 percent, the highest since Sept. 20.

Australia’s dollar rallied 2.1 percent to $1.0159 and gained 2.9 percent to 78.49 yen. New Zealand’s dollar strengthened 2.1 percent to 79.59 U.S. cents and appreciated 2.9 percent to 61.50 yen.

The European Commission recommended Serbia win candidate status and promised European Union entry talks would start once the Balkan state makes “further progress” in ties with the breakaway province of Kosovo. Serbia will join other former Yugoslav republics in moving toward the world’s largest trading bloc.

Serbia’s dinar traded at 100.74 against the euro, up from the central bank’s official mid-rate of 101.2273 yesterday.

The U.S. Senate passed legislation yesterday punishing China for its undervalued currency, increasing concern that trade between the two nations will be hurt.

U.S. lawmakers voted 63-35 to approve a measure that would let companies seek duties to compensate for a weak Chinese yuan. Governments that undervalue their currencies and don’t take corrective action would face penalties, including increased dumping duties and a ban on federal procurement in the U.S.

--With assistance from Gordana Filipovic in Belgrade, Jim Brunsden and James G. Neuger in Brussels, Scott Lanman in Washington and Keith Jenkins in London. Editors: Paul Cox, Greg Storey

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

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


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