Bloomberg News

Dollar Weakens as Fed Pledge Boosts Risk Demand; Real, Rand Rise

January 26, 2012

Jan. 26 (Bloomberg) -- The dollar weakened versus all its 16 most-traded counterparts as the Federal Reserve’s pledge to keep interest rates at a record low for longer than originally forecast spurred investors to seek higher yields.

The U.S. currency touched a five-week low against the euro after policy makers said yesterday the benchmark interest rate would stay low until at least late 2014 from mid-2013 and as Italian yields fell to a six-week low. The Canadian dollar strengthened to parity with the greenback for the first time since November. Brazil’s real was the best performer against the dollar after the unemployment rate fell to a record low.

“The Fed’s statement yesterday did take the market by surprise and adds to the risk rally by making central bank policy even easier in the U.S. if that was possible,” said Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co.

The dollar was little changed at $1.3109 per euro at 5 p.m. in New York after sliding to $1.3184, the weakest level since Dec. 21.

“The euro came up quite a bit with all the dollar selling after the Fed,” said Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York. “Technically, it hit some resistance and we fell below the 55-day moving average and there is some decent technical resistance right above where we saw the highs of the day.”

Currency Rates

The U.S. currency dropped 0.4 percent to 77.45 yen. The euro fell 0.4 percent to 101.53 yen, after touching the strongest level since Dec. 23.

Implied volatility of three-month options of Group of Seven currencies fell to 10.29 percent, from as much as 10.78 percent yesterday, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.

Brazil’s real rose 0.7 percent to 1.7491 per dollar after reaching 1.7320, the strongest in more than two months. The nation, where interest rates are 10.5 percent, saw the unemployment rate fell to a record 4.7 percent in December, beating estimates of a decline to 4.9 percent.

South Africa’s rand gained 1.2 percent to 7.7922 per dollar. It touched 7.7772, the strongest in three months. South Africa’s central bank on Jan. 9 left its benchmark rate unchanged at 5.5 percent, compared with 0.25 percent in the U.S.

Dollar Measure

The Dollar Index dropped to the lowest in six weeks amid speculation the central bank will enter another round of asset purchases potentially debasing the currency. The gauge, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six U.S. trading partners, fell for a second day, losing 0.1 percent to 79.418. It earlier reached 79.067.

The Fed “recognizes the hardships imposed by high and persistent unemployment in an underperforming economy, and it is prepared to provide further monetary accommodation,” Chairman Ben S. Bernanke said yesterday at a press conference in Washington.

“There was a lot of talk that before that the bar would be very high for another round of quantitative easing and the comments yesterday don’t particularly suggest that the bar is very high to use the balance sheet to support growth,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York.

Canada’s currency gained 0.3 percent to C$1.0018 per U.S. dollar after reaching C$0.9982, the strongest since Nov. 1.

Euro Rally

The dollar has dropped 1.1 percent in the past week, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen fell 1.7 percent and the euro rose 0.4 percent.

The euro rallied earlier as Italian 10-year yields fell below 6 percent for the first time since Dec. 8. The nation sold its maximum target at an auction of zero-coupon and inflation- linked debt today.

Three-month cross-currency basis swaps, the rate banks pay to convert euro interest payments into dollars, was 0.68 percentage point below the euro interbank offer rate today, the least expensive since August. It is up from negative 1.1 at the beginning of the year.

The shared currency gained less against the dollar than its higher-yielding counterparts on concern Greece and its private creditors will struggle to agree on a debt swap.

Greek Talks

Charles Dallara and Jean Lemierre, negotiating on behalf of private creditors, return to Athens today after European finance ministers insisted bondholders take bigger losses on their Greek debt holdings.

“The markets are on standby waiting for some sort of a resolution,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “There is a sense that a solution will ultimately emerge, but the whole thing could drag on for quite a while, which will probably keep the euro under pressure.”

The cost to protect against a decline in the euro against the dollar declined. Risk-reversal rates for three-month options on the 17-nation currency were negative 1.6 percent today. The measure reached negative 4.7 percent in November.

The krona fell for a fifth day against the euro after Statistics Sweden said unemployment rose to 7.1 percent in December, up from 6.7 percent in November. A manufacturing confidence index fell to minus 14 from minus 11, the National Institute of Economic Research said.

The krona fell 0.7 percent to 8.8947 per euro.

-- With assistance from Monami Yui in Tokyo and David Goodman in London. Editors: Paul Cox, Greg Storey

To contact the reporters 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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