Bloomberg News

Dollar Falls on Wagers Fed Will Make More Asset Purchases

April 09, 2012

The dollar weakened against most major peers on bets the Federal Reserve will start another round of asset purchases, which may debase the currency, after data last week showed U.S. employers added fewer jobs than forecast.

The greenback slumped against higher-yielding currencies, such as New Zealand’s dollar, which benefited during the Fed’s first two rounds of buying, known as quantitative easing. The franc rose beyond the 1.20-per-euro ceiling imposed by Switzerland’s central bank.

“The market is torn between two dominant themes: risk aversion, which is dollar positive, and the fear that last Friday’s payrolls numbers could bring back quantitative easing, which is dollar negative,” said Boris Schlossberg, director of research at the online currency trader GFT Forex in New York.

The dollar declined 0.1 percent to $1.3106 per euro at 5 p.m. New York time after gaining earlier as much as 0.5 percent. The U.S. currency fell 0.2 percent to 81.49 yen and slid to as low as 81.20 yen, the weakest level since March 8. Europe’s shared currency was little changed at 106.80 yen after falling earlier to 106.12 yen, the weakest since March 7.

Markets in New Zealand, Australia and the U.K. were closed today for a public holiday.

Kiwi Climbs

Brazil’s real and New Zealand’s dollar, nicknamed the kiwi, led gains among the greenback’s 16 major counterparts tracked by Bloomberg. The kiwi strengthened 0.2 percent to 82.16 U.S. cents. The real appreciated 0.3 percent to 1.8179 per dollar.

Mexico’s peso gained 0.1 percent to 12.9712 to the greenback. Norway’s krone, which earlier weakened as much as 0.8 percent, strengthened 0.2 percent to 5.7785 per dollar.

Implied volatility on three-month options on Group of Seven nations’ currencies fell to 10.17 percent after closing as high as 10.33 percent last week, according to a JPMorgan Chase & Co. index. The measure averaged 11.78 percent over the past year.

Lower volatility makes investments in currencies of nations with higher benchmark rates more attractive because the risk in such trades is that market moves will erase profits.

“The primary drivers were the lack of liquidity in the market and very tight stop-losses set by a variety of market participants,” said Ravi Bharadwaj, a market analyst at Western Union Co.’s Western Union Business Solutions unit in Washington. A stop is a pre-established order to buy or sell when a specific price level is reached.

Stocks and commodities declined today, with the Standard & Poor’s 500 Index (SPX) dropping 1.1 percent and the Thomson Reuters/Jefferies CRB Index of raw materials falling as much as 1 percent.

Employment in U.S.

The greenback fell on April 6 against the euro and yen as the Labor Department’s employment report revived bets the Fed will increase stimulus. Nonfarm payrolls added 120,000 jobs in March, the smallest amount in five months, the data showed. Economists in a Bloomberg News survey forecast a 205,000 gain.

The Fed has pledged to keep its target lending rate at a record low range of zero to 0.25 percent through at least late 2014. It will hold off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its target, according to minutes of the central bank’s March 13 meeting released last week. Chairman Ben S. Bernanke is scheduled to speak on financial stability at 7:15 p.m. New York time at an Atlanta Fed conference.

Fed Purchases

The central bank bought $2.3 trillion of assets to support the economy in two rounds of quantitative easing from December 2008 to June. During that period, the dollar fell against all of its 16 major counterparts.

The yen gained earlier today as China’s National Bureau of Statistics said consumer prices in the nation rose 3.6 percent from a year earlier. That was more than the median 3.4 percent estimate in a Bloomberg News survey of 33 economists.

“China’s CPI was slightly higher than expected, and higher inflation may constrain the authorities’ ability to offset economic weakness with fiscal stimulus,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York.

The franc breached the 1.20 limit versus the euro early in Asian trading today, the second time the barrier has been crossed since the Swiss National Bank introduced the currency cap on Sept. 6. It reached 1.19962 before weakening 0.1 percent to 1.20199. The currency exceeded the limit last week as the euro slumped and Spain’s 10-year bond yields posted their biggest weekly gains since January on concern the region’s turmoil is spreading.

‘Unlimited Quantities’

The Swiss central bank won’t allow the franc to rise above the ceiling and is ready to buy foreign currencies in “unlimited quantities,” spokesman Walter Meier said April 5.

“The SNB is being challenged on a day-to-day basis because the euro is weakening, helped by continuing worries regarding Spain and ever-lower yields in the core of Europe versus Switzerland,” said Sebastien Galy, a senior currency strategist at Societe Generale SA in New York. “So far it hasn’t worked.”

The yen strengthened earlier as Japan reported a 1.18 trillion yen ($14.5 billion) surplus in its February current account, the widest measure of trade, boosting the currency’s appeal as a haven. The nation had a record deficit in January.

Japan’s currency tends to strengthen during global economic turmoil because the nation’s current-account surplus makes it less reliant on foreign capital.

The yen gained 1.4 percent against nine developed-nation counterparts over the past month, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar rose 0.2 percent, and the euro was little changed. The Australian dollar lost the most, falling 2.7 percent.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Paul Cox at Pcox16@bloomberg.net


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