Dollar Falls to 7-Month Low as Fed Unexpectedly Retains Stimulus

The dollar declined to an almost seven-month low as the Federal Reserve unexpectedly refrained from reducing its $85 billion in monthly bond purchases and will keep pumping money into the economy.

The U.S. currency fell the most against Brazil’s real and Turkey’s lira among its 16 most-traded peers after Fed policy makers “decided to await more evidence” of economic progress, including holding its interest-rate target at almost zero until the unemployment rate falls below 6.5 percent. A survey of economists conducted by Bloomberg forecast a $5 billion reduction of Treasury purchases. The pound strengthened versus the dollar after Bank of England minutes showed policy makers saw no need for more stimulus.

“The lack of tapering and lack of adjustment to the unemployment threshold is driving the dollar lower,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a telephone interview. “It’s one of the most dovish outcomes possible.”

The Bloomberg U.S. Dollar Index decreased 1.1 percent to 1,008.28 at 5 p.m. in New York, touching the lowest level on a closing basis since Feb. 20. The greenback slipped 1.2 percent to $1.3521 per euro, reaching the weakest level since Feb. 7, and fell 1.2 percent to 97.94 yen.

Real Rally

Brazil’s real rose 3.1 percent to 2.1860 per dollar, the strongest level since June 27. Turkey’s lira rallied 2.6 percent to 1.9491 per dollar, the strongest in a month.

South Africa’s rand rose versus the dollar following the Fed’s decision to refrain from tapering even after 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.

The currency appreciated 2.2 percent to 9.5872 per dollar after reaching its strongest level since May 27. The rand earlier fell as much as 0.5 percent.

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. The pound gained 1.5 percent to $1.6146.

Bernanke View

Fed Chairman Ben S. Bernanke initially signaled on May 22 that the central bank may reduce its monthly bond purchases, sending the Bloomberg U.S. Dollar Index to the highest level of the year.

“The market has been building up to September tapering, and now they’re disappointed,” said Sireen Harajli, a strategist at Mizuho Bank in New York, said in a telephone interview.

Most Fed policy makers expect the first increase in the nation’s benchmark lending rate to occur in 2015, according to projections released today.

The federal funds rate target will be 2 percent at the end of 2016, according to the median of estimates by five governors on the Fed’s board and 12 reserve bank presidents. That rate compares with their median estimate of 4 percent for where the rate should be at a time of full employment and stable prices.

“The dollar is getting sold and weakening as a result of the Fed prolonging the current rate of asset purchases,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York, said in a telephone interview. “It was largely expected that they were going to announce tapering today. The fact that the markets didn’t get that is reversing expectations.”

Economic Benchmarks

Bernanke previously said he expected the central bank to complete its asset-purchase program in the middle of next year when the unemployment rate is around 7 percent, down from August’s 7.3 percent. Bernanke and the Federal Open Market Committee have said they won’t consider raising its federal funds rate target as long as unemployment is 6.5 percent or higher.

A Commerce report today showed builders began work on fewer U.S. homes than projected in August underscoring the risk that higher mortgage rates pose for the real-estate rebound.

Housing starts rose 0.9 percent to a 891,000 annual rate, following the prior month’s 883,000 pace that was weaker than previously estimated. The median estimate of 83 economists surveyed by Bloomberg called for 917,000.

The Fed has kept interest rates at almost zero since December 2008 and undertaken three rounds of bond buying that have swelled its balance sheet to a record of $3.66 trillion. Ending the Fed’s third round of quantitative easing carries greater significance than completion of the previous two because QE3 involves open-ended purchases, both in amount and duration, whereas its predecessors were introduced with defined purchase levels over a fixed period of time.

Options Activity

Trading in over-the-counter foreign-exchange options totaled $20.5 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 $4.2 billion, the largest share of trades at 21 percent. Options on the euro-dollar rate totaled $3 billion.

Dollar-yen options trading was 7.8 percent more than the average for the past five Wednesdays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 11 percent less than average.

The dollar has gained 1.8 percent this year among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 4.7 percent while the yen lost 11.1 percent.

To contact the reporters on this story: Andrea Wong in New York at awong268@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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.