Bloomberg News

Dollar Tumbles on Fed Interest Rate Pledge, Greek Debt Talks

January 29, 2012

Jan. 28 (Bloomberg) -- The dollar fell against all its most-traded counterparts after the Federal Reserve pledged to keep interest rates low for at least three years, spurring investors to seek higher-yielding assets.

The greenback declined for a second week against the euro, the longest streak in three months, on speculation the U.S. central bank will enact further monetary stimulus and that Greece would reach a deal with private-sector creditors. Canada’s dollar and Norway’s krone rallied as gasoline prices reached an almost five-month high.

“The combination of the direct implications for U.S. yields and the fact that the carrot of quantitative easing is still dangling rather enticingly over the market was an undeniable dollar negative,” said Ray Attrill, head of currency strategy for BNP Paribas SA in New York.

The dollar fell 2.2 percent to $1.3220 per euro, after dropping 2 percent last week, its longest losing streak since October. The greenback lost 0.4 percent to 76.70 yen in its first weekly drop this year. The euro rose 1.8 percent to 101.39 yen.

Canada’s currency had its biggest weekly gain versus the dollar in a month. Crude oil, the largest export for Canada and Norway, was buoyed as gasoline jumped to the strongest level since August.

Canada Rally

The loonie, as the currency is nicknamed, rose 1.1 percent to C$1.0018. It traded stronger than parity on Jan. 26 for the first time since Nov. 1.

Norway’s currency reached its highest level in six weeks against the greenback. The krone gained 2.2 percent to 5.8001 per dollar and 0.3 percent to 7.6675 per euro.

The euro gained against the dollar every day this week. European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday that Greece was “close” to reaching agreement with its creditors.

“The next three days will be very crucial,” Rehn said at the World Economic Forum in Davos, Switzerland. An agreement may come “if not today, then over the weekend,” he said.

Euro area governments are seeking to fill a deeper-than- expected hole in Greece’s finances by pressing investors to accept a lower interest rate on exchanged bonds. The accord is tied to a second financing package for the cash-strapped country, which faces a 14.5 billion-euro bond payment on March 20.

Greek Talks

“The euro is benefitting from hopes that we could enter next week with a deal for Greece to stabilize its finances,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network. “Expectations that U.S. interest rates will be on hold for an even longer duration puts a spotlight back on global interest- rate differentials that highlights a key source of dollar weakness.”

Italy auctioned 182-day bills at a yield of 1.969 percent yesterday, down from 3.251 percent at a sale of similar-maturity debt on Dec. 28. The Frankfurt-based ECB loaned euro-region banks a record 489 billion euros ($646.5 billion)for three years on Dec. 21 to avert a credit crunch.

Futures traders increased their bets the euro will fall versus the dollar to a record for a fifth straight week. So- called net shorts rose to 171,347 on Jan. 24, according to data from the Washington-based Commodity Futures Trading Commission.

Dollar Measure

The Dollar Index, which tracks the U.S. currency against those of six trading partners, declined for a second week, dropping 1.7 percent to 78.825.

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 at a Jan. 25 press conference in Washington after the central bank’s meeting.

The Fed pledged to keep its interest rate at a record low of zero to 0.25 percent until late 2014.

U.S. gross domestic product climbed at a 2.8 percent annual rate following a 1.8 percent gain in the prior quarter, Commerce Department figures showed yesterday in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 3 percent increase.

Weekly Downturn

The dollar was the worst performer this week against its nine developed-nation counterparts, falling 1.6 percent, according to Bloomberg Correlation-Weight Indexes. The euro gained 0.9 percent and the yen fell 0.6 percent.

The yen fell against most of its major counterparts after the Ministry of Finance said Japan’s exports dropped 8 percent in December from a year earlier. The median estimate of 27 economists surveyed by Bloomberg News was for a 7.4 percent decline. The Japanese currency is viewed as a safe haven because the nation’s trade surplus makes the currency attractive because it means the nation doesn’t have to rely on overseas lenders.

Implied volatility of three-month options of Group of Seven currencies was 10.3 percent, almost the lowest in since March, according to the JPMorgan G7 Volatility Index. Low volatility makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.

“We’ve had an environment of very low volatility so that is good for carry trades,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto. “The truth of the matter is that interest rates are on hold for a very long time.”

--Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net

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


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