Bloomberg News

Dollar Weakens as Drop in U.S. Retail Sales Spurs Wagers on Fed

July 16, 2012

The dollar dropped to the lowest in almost a month against the yen and erased gains versus the euro as U.S. retail sales unexpectedly fell, adding to bets the Federal Reserve is closer to a third round of asset purchases.

The euro touched a six-week low against the yen as inflation in the currency bloc matched the lowest since February 2011. The Dollar Index (DXY) reversed an advance before Fed Chairman Ben S. Bernanke testifies to Congress tomorrow, even as U.S. five-year yields reached record lows. Higher-yielding currencies including South Africa’s rand and Mexico’s peso rose as implied volatility for currency options fell to an 11-week low.

“Lower yields, weaker U.S. dollar, that’s consistent with a market that’s expecting more easing from the Fed,” said Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York. “Retail sales points at consumption, which is 70 percent of the U.S. economy, and the last three negative prints don’t paint a positive picture. We still think that there is more downside for the euro versus the dollar.”

The dollar fell 0.4 percent to 78.87 yen at 5 p.m. in New York and touched 78.69 yen, the lowest level since June 18. The shared currency added 0.2 percent to $1.2273 after falling 0.6 percent earlier to $1.2176. It touched $1.2163 on July 13, the lowest since June 2010. The yen appreciated 0.2 percent to 96.80 per euro and reached 96.17 yen, the strongest since June 1.

Dollar Index

The Dollar Index reversed gains after Commerce Department data showed retail sales dropped for a third straight month in June, falling 0.5 percent. The gauge, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.3 percent to 83.349. It rose 0.4 percent earlier.

The sales decrease was worse than the most-pessimistic forecast in a Bloomberg News survey in which the median projection called for a 0.2 percent rise.

Implied volatility on three-month options for Group-of- Seven currencies fell to 9.05 percent, the lowest level since April 27, according to the JPMorgan G7 Volatility Index. Lower volatility makes investments in currencies of nations with higher benchmark interest rates more attractive because the risk in such trades is that market moves will erase profits. The average over the past year is 11.5 percent.

Rand Climbs

The South African rand was the best performer against the dollar, rising 0.8 percent to 8.2025. The country’s key interest rate is 5.5 percent. Mexico’s peso gained 0.5 percent to 13.2192 per dollar, while Australia’s currency advanced 0.2 percent to $1.0249. Benchmark rates in Mexico and Australia are 4.5 percent and 3.5 percent.

The MSCI World Index of stocks erased losses of as much as 0.4 percent before Bernanke testifies tomorrow to the Senate Banking Committee, delivering his semiannual report on the economy and monetary policy. He speaks to the House Financial Services Committee the next day.

The Fed bought $2.3 trillion of Treasury and mortgage- related securities from 2008 to 2011 in two rounds of a stimulus strategy called quantitative easing.

The dollar tends to sell off before quantitative easing and “rallies on the fact,” Marc Chandler, currency strategist at Brown Brothers Harriman & Co., said in a Bloomberg Television interview on “Lunch Money.”

“That’s one of the reasons we only have the euro going down to about $1.19 in the third quarter,” Chandler said. “We’re concerned that the focus shifts back to the U.S. with its QE, presidential elections, or its fiscal cliff. For all those reasons, we look for the euro to have a better fourth quarter than third quarter.” The “fiscal cliff” represents tax increases and spending cuts that will take place unless Congress reaches agreement on the nation’s finances.

Yield Drops

The dollar’s losses were tempered as investors sought safety in U.S. Treasuries. U.S. five-year note yields fell to a record 0.5770 percent.

Japan’s currency rose versus the greenback as the extra yield investors receive for investing in U.S. five-year debt versus comparable Japanese government bonds fell to the lowest since February, limiting dollar-denominated assets’ appeal. The yield spread was 41 basis points, or 0.41 percentage point.

“U.S. Treasury yields are lower, the yen is benefiting and it’s a relatively classic case of a ratcheting-up of Fed-easing expectations,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York.

Demand for refuge amid concern that global growth is faltering and Europe’s debt crisis is worsening also drove government-debt yields to record lows in the U.K., Canada, France, Germany and the Netherlands.

Merkel Stance

The rate of inflation in the euro area was at 2.4 percent in June, the same as in May, the European Union’s statistics office in Luxembourg said today. Earlier the euro traded below $1.22 for a third day as German Chancellor Angela Merkel said she hasn’t softened her stance on measures to stem the sovereign debt crisis.

The euro remained stronger versus the dollar and down against the yen as Moody’s Investors Service lowered long-term debt and deposit ratings on 10 Italian banks, citing its downgrade July 13 of Italy’s government bond rating.

The shared currency was within two cents of its lifetime average of $1.2087 from Jan. 1, 1999, when it began trading, through July 13. It declined 3.9 percent over the past three months, the worst performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen advanced 6 percent, and the dollar gained 3.6 percent.

Even with the U.K. in its first double-dip recession since 1975, exports to Europe falling and the Bank of England adding to the supply of sterling by injecting 375 billion pounds ($586 billion) of stimulus, the pound rose 3.1 percent over the past six months. That’s the best performance of the basket of 10 developed-nation currencies tracked by Bloomberg.

The pound gained 0.2 percent to 78.49 pence per euro today and touched 78.32 pence, the strongest level since Oct. 31, 2008. Sterling rose 0.4 percent to $1.5637.

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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