Dollar Drops to 8-Month Low as Risk Appetite Swells on Fed Bets

The dollar slid to the weakest since February as appetite for higher-yielding assets rose on bets the Federal Reserve will delay tapering stimulus after a last-minute deal pushed the political battle over U.S. spending into 2014.

Australia’s dollar climbed against all of its major peers as a Bloomberg survey forecast the Fed won’t start slowing bond purchases, which tend to debase the U.S. currency while fueling risk appetite, until March. The greenback had the biggest weekly drop in a month versus the euro. Sterling rose amid signs the U.K. economy is gaining steam. The U.S. jobless rate held at 7.3 percent last month, data next week may show.

“The deal may be on, but tapering may be totally off until at least the end of the first quarter,” Ashraf Laidi, chief executive officer of Intermarket Strategy Ltd. in London, said yesterday in a phone interview. “That triggers flows into higher-yielders like the Aussie.”

The Bloomberg U.S. Dollar Index, which monitors the greenback against 10 other major currencies, slumped 1 percent this week in New York, the most since the five days ended Sept. 20, to 1,002.73. It dropped to as low as 1,000.70, the least since Feb. 13.

The U.S. currency depreciated 1 percent against the euro, also the biggest weekly decline since Sept. 20, to $1.3687 and touched $1.3704, the weakest since Feb. 1. The dollar fell 0.9 percent to 97.72 yen. Europe’s 17-nation shared currency gained 0.2 percent to 133.79 yen in its second weekly advance.

Three Months

The dollar sank 3.8 percent over the past three months, the worst performer in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 0.9 percent, while the yen dropped 0.8 percent.

The greenback slid this week against all of its 16 most-traded counterparts. New Zealand’s dollar and Norway’s krone were the two biggest winners after the Aussie, gaining 2.2 and 1.7 percent. The Taiwanese dollar and Brazil’s real gained the least, rising 0.1 percent and 0.3 percent.

The Australian dollar strengthened after China’s National Bureau of Statistics said gross domestic product expanded at a faster pace for the first time in three quarters, quickening 7.8 percent in the three months through September from a year earlier. China, the world’s second-biggest economy is the South Pacific nation’s largest trade partner.

‘Bodes Well’

“We are seeing a turnaround for the Chinese economy, and that bodes well for the Australian dollar,” David de Ferranti, a Sydney-based market analyst at FXCM Inc., said yesterday.

The Aussie gained 2.2 percent to 96.77 U.S. cents, the most since the five days ended Sept. 6.

Sterling rose against the greenback for the first time in three weeks as data showed U.K. retail sales rose more than forecast last month and claims for unemployment benefits fell in September by the most in 16 years.

“There’s a lot of bullish sentiment toward the pound,” Kathleen Brooks, European research director at Forex.com in London, said Oct. 17. “It’s being driven by a weak tone in the dollar combined with the U.K. data.”

The pound gained 1.3 percent to $1.6167 and reached $1.6225, the strongest level since Oct. 3.

The agreement reached by congressional Democrats and Republicans this week ended a 16-day partial shutdown of the U.S. government and averted the potential for a default. It extended the nation’s borrowing authority to Feb. 7, from Oct. 17, and will fund the government through Jan. 15.

Improving Sentiment

“The removal of the U.S. default risk added to improving risk sentiment,” Hideki Hayashi, a researcher at the Japan Center for Economic Research in Tokyo, said yesterday. Speculation that the Fed “will not rush to reduce stimulus already gave some underlying support to emerging-market assets,” he said.

The central bank buys $85 billion of bonds a month to put pressure on long-term borrowing rates and spur growth. Fed policy makers unexpectedly refrained from reducing the purchases after last month’s meeting, saying they wanted more evidence of an economic recovery.

“The market is getting grumpy with the dollar,” David Bloom, head of global currency strategy at HSBC Holdings Plc in London, said Oct. 17 in an interview on Bloomberg Television. “It is going through the throes of thinking, can the Fed taper this year? It’s starting to look less likely.”

Fed Bets

The central bank will delay the first cut to its buying until March, according to the median estimate of 40 economists surveyed by Bloomberg Oct. 17-18. A poll last month forecast the first reduction would be in December.

Carry trades, in which investors borrow in countries with low interest rates and use the proceeds to invest in those with higher rates, are making investors the most money in more than a year amid bets the Fed will postpone slowing its bond-buying.

Deutsche Bank AG’s G-10 FX Carry Basket index gained 4.7 percent from Aug. 30 through Oct. 17, poised for its biggest two-month gain since rising 4.8 percent from June to July 2012. Confidence in trades has also been supported by the lowest volatility in more than nine months.

JPMorgan Chase & Co.’s Global FX Volatility Index fell to as low as 7.73 percent yesterday, the least since Jan. 9. It reached a high this year of 11.96 percent on June 24. The average in 2013 is 9.33 percent.

U.S. nonfarm payrolls increased by 180,000 workers last month, economists in a Bloomberg survey forecast before Labor Department data due Oct. 22. The estimate matches the 2013 monthly average and compares with 169,000 in August. The jobless rate was unchanged, economists projected. The release was postponed from Oct. 4 because of the government shutdown.

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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