India’s rupee led declines among the currencies of the biggest emerging-market economies as the Federal Reserve signaled a reduction in stimulus is still on track, spurring a wave of cash to flow back into larger nations.
The Bloomberg U.S. Dollar Index rose for a second week and touched its highest level since Aug. 2. An equally weighted basket of currencies of Brazil, Russia, India, China and South Africa touched its lowest level versus the dollar since June 2010 on concern a paring of stimulus under the Fed’s quantitative-easing strategy would intensify outflows from the currencies. The Commerce Department may report Aug. 30 that U.S. consumer spending increased 0.3 percent in July.
“What we’ve been seeing is this clear-out of emerging-market positioning and back into the Group of 10,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit, said in a telephone interview. “The core -- the U.S., U.K. and euro zone -- seem to be the largest beneficiaries of that.”
The dollar rose 1.2 percent to 97.72 yen this week in New York. The U.S. currency fell 0.4 percent to $1.3383 per euro. Europe’s 17-nation common currency rallied 1.6 percent to 130.10 yen.
The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major peers, climbed 0.4 percent to 1,026.15.
Minutes of the July 30-31 Federal Open Market Committee meeting released this week showed policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to taper purchases this year if the economy strengthens, with a few saying a reduction may be needed soon.
Consumer spending may have risen 0.3 percent from the previous month, according to median forecast of 42 economists surveyed by Bloomberg. The measure increased 0.5 percent in June.
Speculation that the Fed may reduce its purchases of U.S. government bonds has sparked an increased in borrowing costs. Yields (USGG10YR) on 10-year Treasuries touched 2.93 percent on Aug. 22, the highest since July 2011.
Yields on similar-maturity Brazil bonds increased 25 basis points to 4.79 percent, while those on Indonesian debt jumped 77 basis points to 5.90 percent.
“Unfortunately, I think we might not be done with a U.S. Treasury selloff,” said Richard Cochinos, head of Americas G-10 FX Strategy at Citigroup Inc. in New York. “Because of that, you could see additional flow out of emerging markets.”
The Reserve Bank of India said the nation’s economic and monetary policies must focus on preserving financial stability as the U.S. prepares to cut stimulus.
Weakness in the local currency, which tumbled 1x percent this year, could fuel already “high” consumer-price inflation, the central bank said in its annual report released in Mumbai this week. Asia’s No. 3 economy also faces risks from a current-account deficit that’s not sustainable, slowing growth, a budget gap and rising bad loans at banks, it said.
The rupee declined 2.7 this week, touching a record low of 65.5600 per dollar,
Indonesia’s rupiah lost 3.8 percent this week, the most of the dollar’s 24 emerging-market counterparts, amid a record current-account deficit in the second quarter and worse-than-estimated economic growth. The government is in talks to update so-called trigger points that would enable it easier access to a standby loan of about $5 billion from the World Bank, Deputy Finance Minister Mahendra Siregar said.
Indonesia’s tender fell to 10,780 per dollar and touched its lowest level since 2009.
Carmen Reinhart, a Harvard University economist and co-author of a history of debt crises, said emerging markets are deteriorating as the U.S. recovers and may worsen as global interest rates begin to increase.
“It could get very ugly,” Reinhart said yesterday in a Bloomberg Television interview with Sara Eisen from the Fed’s annual conference in Jackson Hole, Wyoming. “Emerging markets had a capital flow bonanza lasting several years, the golden boom years, and the probability of a banking crisis, the probability of a currency crash, the probability of a default, all increase afterward.”
Bernanke, 59, isn’t attending the gathering in Jackson Hole, the first Fed chairman to pass it up since 1988. His second term expires in January, and President Barack Obama is considering candidates to succeed him, including Vice Chairman Janet Yellen and former Treasury Secretary Lawrence Summers.
Yellen will moderate a panel today that includes Bank of Japan Governor Haruhiko Kuroda and Bank of England Deputy Governor Charles Bean. The BOJ doubled its monthly bond purchases to more than 7 trillion yen ($71 billion) in April to stoke 2 percent inflation in two years.
Kuroda backed a planned sale-tax increase aimed at reducing the nation’s debt. If a higher levy or changing conditions overseas heightened the risk of a slowdown, the central bank “won’t hesitate” to add to its unprecedented easing policy, Mainichi newspaper reported on Aug. 21, citing an interview.
The yen has tumbled 20 percent in the past 12 months, the worst performer among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes. The dollar strengthened 2.9 percent and the euro gained 10 percent.
“There’s a broad understand that the Bank of Japan probably will have to look at more policy easing sooner rather than later,” Citigroup’s Cochinos said.
Traders reduced bets the yen will weaken, according to data from the Commodity Futures Trading Commission. The difference in the number of wagers by hedge funds and other large speculators on a decline in the currency compared with those on a gain -- so-called net shorts -- was 71,721 on Aug. 20, compared with 74,462 a week earlier.
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