Dollar Strengthens as Fed’s Bullard Says October Taper Possible

The dollar rose versus most of its 16 most-traded peers after Federal Reserve Bank of St. Louis President James Bullard said the choice not to slow bond buying was a close call and “small” tapering is possible next month.

The U.S. currency erased a loss versus the 17-nation euro after Bullard, a voter on policy this year who has backed record stimulus, said the Fed’s decision to unexpectedly refrain from reducing its $85 billion in monthly bond purchases was a “borderline decision” after “weaker data came in,” in an interview on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene. The euro traded at almost the strongest since 2009 versus the yen before Germany’s federal elections Sept. 22.

“Tapering is still coming, just not as early as the market believed,” Sara Yates, a global-currency strategist at JPMorgan Chase & Co.’s JPMorgan Private Bank, said in a telephone interview today. “We continue to think the dollar will outperform against currencies, such as the yen and Swiss franc.”

The dollar was little changed at $1.3524 per euro at 5 p.m. New York time. It touched $1.3569 yesterday, the lowest level since Feb. 7. The greenback slipped 0.1 percent to 99.36 yen, while the single currency fell 0.1 percent to 134.37 yen after rising to 134.95 yesterday, the strongest since November 2009.

Market Swings

“Bullard is trying to put taper back on the table,” Kit Juckes, a global strategist at Societe Generale SA in London, said in a phone interview. “We’re flip-flopping around trying to figure out where we’re going to go.”

Norway’s krone tumbled the most in almost a month against the euro amid speculation the central bank will take steps to damp the currency’s appreciation while its Swedish counterpart tolerates a stronger krona.

Norway’s krone dropped 1.7 percent to 8.0247 per euro and declined 1.8 percent to 5.9333 per dollar.

The New Zealand dollar gained for a third week, extending its advance since the Reserve Bank said on Sept. 12 that interest-rate increases may be required next year from the all-time low of 2.5 percent as inflation picks up.

The kiwi slipped 0.1 percent to 83.68 U.S cents after climbing to 84.36 yesterday, the strongest since May 9. It has strengthened 2.9 percent this week.

Emerging Markets

India’s rupee slid 0.8 percent to 62.2775 per dollar, paring the week’s advance, after the central bank unexpectedly raised its benchmark rate to damp inflation while scaling back earlier measures meant to support the currency.

South Africa’s rand dropped the most in almost a month following Bullard’s comments. The currency depreciated 1.9 percent to 9.8881 per dollar, paring its gain this week.

An index of household confidence in the euro zone improved to minus 14.9, the highest level since July 2011, from minus 15.6 a month earlier, the European Commission in Brussels said in a preliminary report. Economists had forecast an increase to minus 14.5, according to the median of 23 estimates in a Bloomberg News survey.

Adidas AG (ADS), the world’s second-largest sporting-goods maker, reduced the low end of its profit forecast yesterday, partly because of the strength of the euro, which has caused analysts to cut profit estimates in recent weeks.

Germany will hold federal elections on Sunday. An INSA opinion poll published yesterday showed both the opposition Social Democrats and Angela Merkel’s Christian Democratic-led group will fall short of a majority with their preferred coalition partners.

German Votes

“People in Europe are unwinding their positions ahead of the German election,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview. “Investors are taking profit after being long euro-dollar after the FOMC decision.” A long position is a bet that an asset will increase in value.

The euro may weaken if the anti-euro Alliance for Germany party reaches the 5 percent threshold of the national vote needed to win parliamentary seats, according to Thomas Kressin, head of European foreign exchange at Pacific Investment Management Co. in Munich.

The euro has risen 4.2 percent in the past six months, the second-best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen lost 4.5 percent, while the dollar fell 0.8 percent.

“This is in part a perception that the crisis is off the boil,” said Jane Foley, senior currency strategist at Rabobank International in London. “It’s also a reflection of the very good current-account position of the euro zone.”

Draghi Talks

European Central Bank President Mario Draghi will address the European Parliament on Sept. 23. He has refrained from printing euros to buy bonds, contrasting with the Federal Reserve, which decided to maintain monthly asset purchases at $85 billion at a two-day meeting ended Sept. 18. Economists surveyed by Bloomberg had forecast the U.S. central bank to reduce monthly Treasury purchases by $5 billion.

Trading in over-the-counter foreign-exchange options totaled $18 billion, from $43 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 $5.7 billion, the largest share of trades at 33 percent. Options on the euro-pound rate totaled $2.6 billion.

Dollar-yen options trading was 59 percent more than the average for the past five Fridays at a similar time in the day, according to Bloomberg analysis. Euro-pound options trading was 499 percent more than average.

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

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

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