Bloomberg News

Dollar Ends First Week of 2013 Higher Versus Euro on Fed Outlook

January 05, 2013

The dollar closed higher versus the euro in the first week of the year after the Federal Reserve suggested bond-buying operations may end in the middle of 2013 and concern grew the U.S. will struggle to reach a debt accord.

The yen fell for an eighth week, its longest losing streak in 24 years, as Japanese Prime Minister Shinzo Abe reiterated his goal of weakening the currency and boosting inflation. The euro pared losses yesterday as a higher-than-forecast U.S. unemployment rate spurred speculation the Fed won’t hurry to end its quantitative-easing stimulus. The European Central Bank meets Jan. 10.

“The more aggressive tone out of the Fed drove people into the dollar, thinking perhaps policy action will come to an end earlier than anticipated,” said Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management, which oversees about $250 million. “The yen has become more interesting on daily basis depending on how aggressive Abe can ultimately be in trying to effectively nationalize the central bank to drive their inflation mandate.”

The U.S. currency gained 1.1 percent to $1.3069 per euro this week in New York after falling the previous three weeks. It was the biggest jump since September. The dollar rose 2.6 percent to 88.15 yen and touched 88.41 yesterday, the highest level since July 2010. It hasn’t fallen for as many weeks since February 1989. The yen slid 1.4 percent to 115.21 per euro.

Volatility Drops

A gauge of price swings fell for the first time in three weeks. JPMorgan Chase & Co.’s G7 Volatility Index, based on three-month options for Group of Seven currencies, touched 7.54 percent on Jan. 3, the lowest level since Dec. 21. The average in 2012 was 9.23 percent. A drop makes investments in currencies with higher benchmark interest rates more attractive as the risk in such trades is that market moves will erase profits.

Futures traders reversed wagers that the euro will decline against the U.S. dollar, betting on a gain by the 17-nation currency for the first time since August 2011, figures from the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 5,126 on Jan. 1 , compared with net shorts of 2,549 a week earlier.

New Zealand’s dollar was the biggest winner over the past month among 10 developed-nation currencies monitored by the Bloomberg Correlation-Weighted Indexes, gaining 1.3 percent. The U.S. dollar added 0.2 percent, while the euro was little changed and the yen lost 7.7 percent in the biggest decline.

‘Bold’ Policy

Japan’s newly installed prime minister said on Jan. 1 the most urgent issue for his country was to break out of currency appreciation and deflation. “Bold” monetary policy is one of the three prongs of his economic measures, Abe said. The Bank of Japan will hold its first 2013 policy meeting Jan. 21-22.

Mexico’s peso and the New Zealand dollar were the biggest winners this week among the U.S. currency’s 16 most-traded counterparts as risk appetite rose after Congress approved a deal on Jan. 1 avoiding the so-called fiscal cliff. The agreement made income-tax cuts from the George W. Bush-era permanent for most workers.

If no accord had been reached, $600 billion in automatic tax increases and spending cuts would have started this month, which the Congressional Budget Office said might lead to recession this year.

The peso climbed 2.2 percent to 12.7417 to the greenback, and New Zealand’s currency rose 1.5 percent to 83.17 U.S. cents.

Debt Ceiling

Appetite for higher-yielding assets was tempered by concern the U.S. Treasury will exhaust what it called “extraordinary” measures to keep funding the government by February or March after the nation hit its $16.4 trillion debt ceiling Dec. 31. Lawmakers will grapple over raising the limit.

The dollar reached a three-week high yesterday versus the euro after minutes released a day earlier of the Fed’s Dec. 11- 12 meeting showed board members said they’ll probably end the central bank’s $85 billion in monthly bond purchases in its third round of quantitative easing some time in 2013. The Fed bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds of the stimulus strategy.

“The dollar got a lift out of the latest Fed minutes, which for the first time entertained the notion of the bank scaling back some of its easy monetary policies,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said Jan. 3. “The Fed’s low-rate policies have been a leading source of weakness for the greenback.”

The central bank said Dec. 12 it would hold borrowing costs at virtually zero “at least as long” as the jobless rate remains above 6.5 percent and inflation projections are for no more than 2.5 percent.

Jobless Rate

The greenback pared gains yesterday after data showed the U.S. jobless rate was higher than forecast in December, tempering bets on when the Fed will end its stimulus.

The unemployment rate was 7.8 percent in December after the November figure was revised to that level from a previously reported 7.7 percent, a Labor Department report showed. The median forecast for December in a Bloomberg News survey was for 7.7 percent.

“I looked at the unemployment report, and I didn’t see any improvement,” Joseph Trevisani, chief market strategist at WorldWideMarkets Ltd. in Woodcliff Lake, New Jersey, said yesterday in a telephone interview. “Nobody one thinks their policy is going to end any time soon.”

The agency also said U.S. employers added 155,000 workers last month following a revised 161,000 advance in November.

The ECB will hold its benchmark main refinancing rate at a historic low of 0.75 percent at its policy meeting next week, economists forecast in a Bloomberg survey.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net

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


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