Bloomberg News

Dollar Pares Gain Amid Speculation Fed Considers Stimulus

August 22, 2012

The dollar pared a gain against the euro amid speculation the Federal Reserve will take steps to boost growth even though recent reports suggest the economy is gaining momentum.

The greenback strengthened earlier with the yen after Japan reported a wider-than-estimated trade deficit in July. The U.S. central bank is considering different methods of bond purchases for further easing as investors have been reducing their expectations further stimulus, according to a person familiar with a Medley Global Advisors report who declined to be identified. The euro gained as Greek Prime Minister Antonis Samaras said in Athens his government was determined to meet all bailout targets and exit the sovereign-debt crisis.

“There’s a bit of talk about a Medley report that’s quite dovish, looking for further accommodation from the Fed,” Thomas Molloy, chief dealer at FX Solutions LLC, an online currency- trading company in Saddle River, New Jersey, said in a telephone interview. “That apparently is behind the squeeze.”

Medley officials couldn’t be immediately reached by telephone for comment.

The U.S. currency was little changed at $1.2471 per euro at 12:43 p.m. New York time after falling to $1.2488 yesterday, the weakest level since July 5. The yen climbed 0.2 percent to 98.72 per euro. The dollar fell 0.1 percent to 79.18 yen.

The Fed is scheduled to release the minutes of its July 31- Aug. 1 policy meeting today. The Federal Open Market Committee said then it would pump fresh stimulus if necessary into the weakening economic expansion to boost growth and reduce an unemployment rate that’s been stuck at 8 percent or higher for more than three years.

‘Key Decider’

Payrolls in the U.S. increased 163,000 in July following a revised 64,000 rise the previous month that was less than initially reported, Labor Department figures showed Aug. 3 in Washington, even as unemployment rose to 8.3 percent.

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt between 2008 and 2011 in two rounds of quantitative easing to cap borrowing costs. Policy makers have held the Fed’s key rate in a range of zero to 0.25 percent since 2008 and plan to keep it there at least through late 2014.

“The Fed minutes will be the key decider,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York, said in a telephone interview. “It will impact the U.S. Treasury curve, which could then impact more broadly sentiment, and in foreign-exchange space would impact the yen.”

‘Biggest Issue’

Purchases of previously owned houses, tabulated when a contract closes, increased 2.3 percent to a 4.47 million annual rate, figures from the National Association of Realtors showed today in Washington. The data were posted on the group’s website ahead of the usual 10 a.m. release time. The median forecast of 73 economists surveyed by Bloomberg called for a rise to a 4.51 million rate.

“There are still some people with hope, with the perception, that we’ve hit the bottom of the housing of the market,” Brian Taylor, chief currency trader at Manufacturers & Traders Trust in Buffalo, New York, said in a telephone interview. “The biggest issue right now is when is the Fed going to move and what exactly are they going to do.”

The Dollar Index, which IntercontinentalExchange Inc. (ICE:US) uses to track the U.S. currency against those of six major trading partners, was little changed at 81.910 after climbing as high as 82.121.

Dollar Gains

The measure may find so-called support at around 81.5 ending recent declines, according to Derek Mumford, a director in Sydney at Rochford Capital, a currency risk-management company. “That will contain any selloff at the moment,” he said. Support refers to an area on a chart where orders to buy may be clustered.

The dollar has advanced 7.1 percent in the past 12 months, the best performance of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen gained 1.8 percent, and the euro weakened 8.1 percent.

The yen strengthened against all of its major peers as Japan’s trade deficit was 517.4 billion yen last month, following a revised 60.3 billion yen surplus in June, the Finance Ministry said in Tokyo. The median forecast in a Bloomberg News survey of economists was for a shortfall of 270 billion yen. Exports fell 8.1 percent from a year earlier, compared with an estimated 2.9 percent decline.

Purchasing managers reports tomorrow are forecast to show contraction in German and French manufacturing, with the measure for the euro-area as a whole also predicted to shrink, according to surveys conducted by Bloomberg News.

Juncker, Merkel

The shared currency gained against the majority of its most-traded counterparts as Samaras told Luxembourg Prime Minister Jean-Claude Juncker, head of the euro group of finance ministers, that Greece is speeding up reforms.

German Chancellor Angela Merkel earlier signaled that she’s willing to discuss a Greek request for more time to meet the terms of its international rescue, leaving the door open to potential concessions. Merkel spoke in the Moldovan capital Chisinau before meeting with Samaras in Berlin on Aug. 24.

The euro may be poised to strengthen against the Aussie if it breaches the 50-day moving average of A$1.1962, according to Societe Generale’s Galy.

The shared currency rose 0.4 percent to A$1.1935 today after falling from A$1.3031 on May 18.

“It’s definitely one to look for a turnaround,” Galy said. “It’s partly technical, just based on the positioning. It’s also that Aussie has been massively bought in the past weeks, so there’s natural tendency for it to come down.”

Societe Generale also forecasts the Aussie declining against the dollar, to 98 U.S. cents at the end of the third quarter and 95 U.S. cents by Dec. 31.

Australia’s currency dropped 0.4 percent to $1.0447, and dropped 0.5 percent to 82.72 yen.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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


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