Dollar Drops as Bets Fade on Fed Tapering; N.Z. Currency Rallies

The dollar weakened against most of its major peers after Federal Reserve Chairman Ben S. Bernanke damped speculation that a reduction of U.S. monetary stimulus was imminent.

New Zealand’s currency rose after the People’s Bank of China said it will remove limits on lending rates, while the yen lost for the week versus the greenback before upper-house elections in Japan. Group-of-20 nations’ finance chiefs met in Moscow on the global economy. Bernanke told the Senate Banking Committee yesterday it was “way too early to make any judgment” on starting to taper Fed bond buying in September.

“The U.S. dollar is softer overall,” Nick Bennenbroek, head of currency strategy at Wells Fargo Securities LLC in New York, wrote in a note to clients. “We still lean toward gains in the U.S. dollar over time, anticipating that the Fed will shift gradually to a tapering of its bond purchase program.”

The greenback lost 0.3 percent to $1.3143 per euro at 5 p.m. New York time, expanding a weekly drop to 0.6 percent. The U.S. currency gained 0.2 percent to 100.65 yen, rising 1.4 percent on the week. The euro gained 0.5 percent to 132.26 yen.

The dollar will trade within a range of $1.28 to $1.33 per euro for the coming weeks, according to Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. It will probably rise to 102 yen in the next two weeks, before climbing to 110 within six-to-12 months, he said.

Kiwi Climbs

The New Zealand dollar, nicknamed the kiwi, rallied versus most major peers, gaining 0.3 percent to 79.21 U.S. cents. China, the nation’s largest trade partner, said it will eliminate the lower limit on lending rates offered by the nation’s financial institutions as growth slows and authorities expand markets’ role in the world’s second-biggest economy.

The Brazilian real slid versus all of its 16 most-traded counterparts amid speculation a faltering economy will prompt policy makers to limit increases in borrowing costs. The currency sank 0.9 percent to 2.2471 per dollar.

South Africa’s rand was the top performer against the dollar among major currencies on bets the Fed won’t soon slow stimulus. The rand rose 0.6 percent to 9.8741 to the greenback.

Futures traders increased their wagers that the yen will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on an increase -- so-called net shorts -- was 85,762 on July 16, compared with net shorts of 80,305 a week earlier.

Aussie Bets

Speculators raised bets to a record that the Australian dollar will decline against the greenback. Net shorts for the Aussie versus the greenback totaled 70,686 on July 16, the most ever, versus 63,255 a week earlier.

Bernanke yesterday delivered his semi-annual report on U.S. monetary policy to the Senate panel after telling the House Financial Services Committee July 17 the Fed’s purchases “are by no means on a preset course” and could be cut more quickly or expanded as economic conditions warrant.

The U.S. central bank buys $85 billion of Treasuries and mortgage debt each month as part of its third round of quantitative-easing stimulus to cap borrowing costs. Bernanke said last month the purchases may slow this year and stop in mid-2014 if economic growth meets policy makers’ projections.

JPMorgan Chase & Co.’s Global FX Volatility Index slid to 9.72 percent, the least since May 28. It touched a one-year high of 11.96 percent on June 24.

The Bloomberg Dollar Index, which tracks the greenback against 10 other major currencies, retreated 0.2 percent to 1,032.77, adding to a 0.5 percent decline for the week.

‘Different Scenarios’

“After Bernanke’s comments this week, it’s clear that the door is wide open for a number of different scenarios, including increasing asset purchases if that becomes necessary,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a phone interview.

G-20 finance chiefs will call at their meeting for careful and clear monetary-policy changes, deflecting concern that U.S. reaction to a recovery will hurt emerging economies, according to a draft statement obtained by Bloomberg News.

The yen had the biggest weekly slide out of all of its 16 most-traded peers tracked by Bloomberg. It has lost 2 percent against the euro, the biggest five-day drop in four weeks.

Japan Election

Japanese Prime Minister Shinzo Abe’s Liberal Democratic Party and its coalition partner New Komeito are on track to win more than 65 of the 121 upper house seats being contested July 21, according to a poll published in the Nikkei newspaper on July 17. Victory will give the parties control of both chambers of parliament, strengthening the prime minister’s ability to carry out a three-pronged plan of monetary easing, fiscal stimulus and deregulation known as Abenomics.

The yen has lost 11 percent this year in a basket of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has gained 5.3 percent.

Trading in over-the-counter foreign-exchange options totaled $28 billion, compared with $31 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $8.5 billion, the largest share of trades at 30 percent. Euro-dollar options totaled $2.9 billion, or 10 percent.

Dollar-yen options trading was 6 percent above the average for the past five Fridays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 18 percent lower than average.

To contact the reporter on this story: 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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