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Dollar Trades at Almost 5-Week Low Before Fed Tapering Decision

The dollar traded at almost a five-week low before the Federal Reserve announces whether it will slow its $85 billion of monthly bond purchases that have capped borrowing costs.

The U.S. currency dropped against the yen as economists predict the central bank will cut Treasury purchases to $40 billion, while continuing to buy $40 billion of mortgage-backed securities. The pound strengthened against all of its 16 major counterparts after Bank of England minutes showed policy makers saw no need for more stimulus.

“Much of the tapering expectation has been priced in already,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York. “A lot of people are putting a lot of weight on what the Fed is forecasting for the unemployment rate and the federal fund rate in 2016.”

The Bloomberg U.S. Dollar Index, which tracks the greenback against a basket of 10 major currencies, was little changed at 1,019.27 at 12:23 p.m. in New York, after falling to 1,017.30 on Sept. 16, the lowest level since Aug. 12.

Market Prices

The dollar dropped 0.1 percent to 99.05 yen after falling to 98.46 yen on Sept. 16, the lowest level since Sept. 2. The U.S. currency was little changed at $1.3356 per euro after depreciating to $1.3386 on Sept. 16, the weakest since Aug. 28. The yen strengthened 0.1 percent to 132.27 per euro.

The Pakistan rupee fell to a record low on speculation purchases of dollars by local banks spurred wider buying of the greenback. The currency tumbled 0.8 percent to 105.9575 per dollar, according to data compiled by Bloomberg.

“There is buying to cover some payments needed by banks,” said Furqan Punjani, an economist at BMA Capital Management in Karachi. “The rippling effect happened because there is a shortage of U.S. currency in the country.”

The rand weakened 0.1 percent to 9.8090 per dollar after the South African inflation rate rose to a four-year high.

Inflation in Africa’s biggest economy accelerated a second month to 6.4 percent in August, meeting economists’ estimates, from 6.3 percent in July, Pretoria-based Statistics South Africa said today in a statement.

Pound Gains

The pound rose to an eight-month high versus the dollar as Bank of England minutes showed policy makers voted unanimously to keep policy unchanged this month.

Sterling strengthened for a fourth day versus the U.S. currency as the minutes of the Sept. 3-4 meeting showed “no member judged that further stimulus was appropriate at present.” The minutes also showed the panel voted 9-0 to keep the bond-purchase program at 375 billion pounds ($599 billion).

“There were two pound positive takeaways from the statement,” BNP Paribas SA strategists led by global head of foreign-exchange strategy Steven Saywell in London, wrote in a note to clients. The “BOE said recent stronger data presented an upside risk to the growth profile described in the August Inflation report. There was little pushback against rising U.K. rates, as this rise had been accompanied by increasing signs of a recovery taking hold.”

The pound gained 0.4 percent to $1.5961 after rising to $1.5980, the highest level since Jan. 18.

Fed Purchases

Among 64 economists surveyed by Bloomberg News, 33 predict the Fed will reduce its purchases of Treasuries by $5 billion or less, with 31 forecasting a cut of $10 billion or more. The central bank will announce its decision at the end of a two-meeting at 2 p.m. in Washington.

“I anticipate that we’ll see the dollar strengthen in the event that we get at least $10 billion worth of tapering,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. “If we were to get less than $10 billion, that would certainly throw some doubt over whether the Fed is seriously going to persist with tapering and end their purchases, and we’ll see the dollar weaken on that.”

U.S. policy makers have pledged to keep the benchmark interest rate near zero at least as long as unemployment exceeds 6.5 percent and the outlook for inflation is no more than 2.5 percent. The central bank will also release its 2016 economic projections today, including the outlook for the benchmark rate.

“If they do go with tapering, and my gut feeling is they will, it will be offset by a number of mitigating observations,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. “The knee-jerk reaction will be for a stronger dollar. If they then throw in cushioning language I think the dollar might resume its downtrend again.”

Currency Pricing

The dollar has declined 0.6 percent in the past week, the worst performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro dropped 0.2 percent and the yen gained 0.4 percent.

Trading in over-the-counter foreign-exchange options totaled $14 billion, from $17 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 $3.8 billion, the largest share of trades at 28 percent. Options on the euro-dollar rate totaled $1.5 billion.

Dollar-yen options trading was 30 percent more than the average for the past five Tuesdays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 46 percent less than average.

To contact the reporters on this story: Andrea Wong in New York at awong268@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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

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