Bloomberg News

Dollar Rallies as Fed Minutes Dim Prospects for Stimulus

April 03, 2012

The dollar gained to its strongest level in a week against the euro after the Federal Reserve’s policy meeting minutes showed the central bank is holding off from increasing monetary stimulus.

The U.S. currency rallied against the yen as Treasury yields rose, making dollar-denominated securities more attractive. The dollar advanced after the Fed said it won’t undertake asset purchases, known as quantitative easing, unless economic expansion falters or prices rise slower than 2 percent, signaling less additional liquidity to buoy higher-yielding assets. Brazil’s real rose as President Dilma Rousseff ordered a series of tax cuts to protect the nation from slower global growth.

“The dollar is gaining because the market is correct to price out some of the expectation of additional QE that they have been busy pricing in,” said Ray Attrill, head of currency strategy for BNP Paribas SA in New York. “Those that were looking for any kind of strong signal that additional QE is more likely than not are being significantly disappointed.”

The dollar gained 0.7 percent to $1.3233 per euro at 5 p.m. New York time, the strongest since March 26. It touched $1.3368 earlier, almost the weakest since Feb. 29. The U.S. currency added 0.9 percent to 82.81 yen. The euro gained 0.2 percent to 109.59 yen.

The yield difference between Treasury two-year notes and similar maturity Japanese securities rose to 23 basis points, or 0.23 percentage point, from 20 basis points yesterday. The U.S. two-year benchmark yield rose five basis points to 0.37 percent.

Dollar Measure

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. major trading partners, rose as much as 0.9 percent, the biggest intraday gain since March 9, to trade at 79.497.

The Australian dollar weakened versus most of its 16 major counterparts after the Reserve Bank signaled it may resume lowering borrowing costs as soon as next month if weaker-than- expected growth slows inflation.

Traders expect the RBA will cut its benchmark rate by 79 basis points over the coming 12 months, according to a Credit Suisse Group AG index based on overnight indexed swap rates.

The Aussie declined 0.8 percent to $1.0331.

Brazil’s real rose 0.4 percent to 1.8246 versus the dollar after it was announced the government will eliminate a payroll tax for employers in 15 industries hardest-hit by a surge in imports.

Europe’s shared currency added to declines before the European Central Bank meets for an interest rate decision tomorrow. The 57 economists surveyed by Bloomberg expect no change to the 1 percent interest rate.

Spain’s Debt

The yield on Spain’s 10-year bonds climbed eight basis points, or 0.08 percentage point, to 5.43 percent today after the unemployment rate rose for an eighth month. Prime Minister Mariano Rajoy is implementing the deepest austerity measures since the nation returned to a democracy in 1978, pushing Spain’s IBEX 35 Index to the only loss during the first quarter among national measures in Western Europe.

“Accelerated fiscal tightening in Spain, at a time when its export markets are slowing and house prices are still falling, suggests that euro-dollar continues to be overly priced,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “Euro is falling versus its European peers. Euro-dollar should eventually break below $1.30 in the coming weeks.”

The dollar is down 2.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro is little changed and the yen has declined 10.1 percent.

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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