Dollar Falls to 15-Year Low Versus Yen on Fed Easing Outlook
The dollar dropped for a second straight month against a basket of currencies including the euro and yen on speculation the Federal Reserve will step up quantitative easing.
The greenback reached a 15-year low against the yen on Oct. 29, before next week’s U.S. elections and meetings of the Fed, the European Central Bank, Bank of England, Bank of Japan and the Reserve Bank of Australia. The Brazilian real fell against all of its major counterparts during October as the government sought to cool foreign inflows.
“You’ve got the quantitative-easing expectations for the Fed,” said Robert Lynch, head of currency strategy at HSBC Holdings Plc in New York. “That’s been one of the key contributors to the weakness in the dollar.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro, yen and pound, fell 1.9 percent to 77.214 on Oct. 29, from 78.720 on Sept. 30. It touched 76.144 on Oct. 15, the lowest level since Dec. 11, 2009.
The gauge of the greenback has dropped 3.9 percent since Sept. 21, when the Fed said in a statement following its policy meeting that it’s prepared “to provide additional accommodation if needed” to support the economy recovery. Policy makers are meeting Nov. 2-3.
“The expectations for Fed easing have been around for quite a while,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “We certainly had a fairly substantial run-up in asset prices like equities and also a further substantial decline in the dollar.”
Slower Inflation
The measure of inflation preferred by the Fed, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.8 percent annual rate in the third quarter, the Commerce Department reported yesterday. The median forecast of economists in a Bloomberg News survey was for a 1 percent pace.
The dollar decreased 3.7 percent to 80.40 yen on Oct. 29, the lowest level since April 1995, from 83.53 on Sept. 30. The U.S. currency depreciated 2.3 percent to $1.3947 per euro, from $1.3634. The euro decreased 1.6 percent to 112.12 yen, from 113.88.
The yen gained for a sixth month against the dollar, matching a stretch of advances that ended in January 2004 as investors sought an easily traded alternative to the dollar before the U.S. central bank’s decision next week. Japan’s currency has appreciated more than 5 percent since authorities acknowledged on Sept. 15 intervening for the first time in six years to help the nation’s export-dependent economy by selling the yen.
‘Bold’ Action
Japan’s Finance Minister Yoshihiko Noda told reporters in Tokyo on Oct. 28 that he’s watching the currency market with great interest and will take “bold” action in it if necessary. The ministry refrained from selling the yen this month.
“If the dollar falls sharply in reaction to QE2, and the 80 level gives way under the strain, the risks increase that the BOJ will feel compelled to do something,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in a research note. “Its strength continues to defy the traditional explanatory models that typically give a privileged position to risk appetite, interest-rate differentials or external positions.”
The Bank of Japan moved ahead the date of its next policy meeting to Nov. 5. The Fed’s rate decision will come a day after U.S. elections on Nov. 2, when the Reserve Bank of Australia meets. The ECB and BOE meet two days later.
Taiwan’s Dollar
A gauge of Asian currencies led by Taiwan’s dollar rose for a second month on speculation Fed easing will increase the amount of funds that can be invested in the region.
The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, has risen 0.8 percent this month following September’s 2.6 percent increase, the biggest since March 2009. Taiwan’s dollar gained 2 percent to 30.62 in October.
The Brazilian real fell 0.6 percent to 1.6991 against the dollar this month as Finance Minister Guido Mantega, fighting what he has described as a “currency war, raised taxes on foreign inflows twice to stem a rally in the currency. The real reached a two-year high of 1.6442 on Oct. 14.
New Zealand’s dollar was the biggest winner against the dollar among major currencies tracked by Bloomberg as Reserve Bank Governor Alan Bollard said on Oct. 28 that the 3 percent official cash rate will probably need to increase.
Euro Versus Dollar
The euro fell against the dollar yesterday as European Union discussions on a permanent mechanism to deal with nations facing default sparked concern that the region’s sovereign-debt crisis may intensify again.
At a summit in Brussels, German Chancellor Angela Merkel won European Union backing for a rewrite of treaties to create a permanent debt-crisis mechanism by 2013, aiming to prevent a repeat of the Greece-led shock that jolted the euro.
“Ultimately, those debt concerns and default concerns will keep the euro’s upside limited even in an environment of a generally weaker dollar,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage.
To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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