Dollar Drops on Bets Fed Won’t Slow Stimulus Soon

The dollar slid to its weakest level in almost two years against the euro after lower-than-forecast U.S. employment gains added to speculation the Federal Reserve will delay reducing stimulus.

The Bloomberg U.S. Dollar Index fell to an eight-month low after data showed employers added 148,000 workers in September, fewer than forecast, indicating the U.S. economy had little momentum leading up to the 16-day partial shutdown of the federal government this month. The Swiss franc touched its strongest level against the greenback since February 2012. The yen lost the most against the euro in almost four years.

“The dollar is weak across the board,” Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a phone interview. “The jobs number was lackluster. It was just no better or dramatically worse than recent months, which just aren’t good enough for the Fed.”

The dollar depreciated 0.7 percent to $1.3781 per euro at 5 p.m. New York time, and touched $1.3792, the weakest level since November 2011. The greenback was little changed at 98.14 yen, while the Japanese currency lost 0.7 percent to 135.25 per euro and reached 135.51, the weakest since November 2009. The Swiss franc climbed as much as 0.9 percent to 89.40 centimes per dollar before trading at 89.47.

Bloomberg’s dollar gauge fell 0.5 percent to 999.46 and touched 998.93, the lowest intraday level since Feb. 6.

Supporting Risk

“A delay in QE tapering from the Fed and prolonging the current pace of QE is supportive of risk and EM currencies,” said Eric Viloria, a senior currency strategist at Gain Capital Group LLC in New York, referring to Fed’s $85 billion in monthly bond purchases under the quantitative-easing stimulus strategy. Emerging-market “currencies associated with improving current account balances are more likely to benefit.”

A Bloomberg index tracking 20 emerging-market currencies including the Brazilian real, South Africa’s rand, the Thai baht and Mexico’s peso rose to 95.5, the highest since June.

Hungary’s forint and the rand were the two of the biggest winners among the dollar’s 31 most-traded peers, rallying 1.3 percent and 1.1 percent. Poland’s zloty gained 1 percent.

A gauge of price swings among Group-of Seven nations’ currencies declined to a nine-month low. The JPMorgan G7 Volatility Index touched 7.6 percent, the lowest level since January, after reaching 10.2 percent on Sept. 3. Smaller price swings tend to boost the appeal of higher-yielding, riskier assets such as emerging-market currencies.

Carry Trades

Deutsche Bank AG’s Group-of-10 FX Carry index was at 115.8 percent, almost the highest since Sept. 19. The measure jumped 2.9 percent last month, the biggest increase since June 2012. In carry trades, investors sell the currency of a nation with low borrowing costs and buy assets where returns are higher.

The U.S. jobs increase followed a revised gain of 193,000 in August that was larger than initially estimated, Labor Department figures showed. A Bloomberg survey of economists forecast a rise of 180,000 in September. The average monthly job gain this year through August was 186,000. Today’s report, originally scheduled for Oct. 4, was delayed by the government shutdown, which began Oct. 1.

The Fed unexpectedly refrained at its September meeting from slowing its monthly bond-buying, saying it wanted more evidence of an economic recovery. The purchases, made to hold borrowing costs down and support growth, tend to debase the U.S. currency.

Until March

The central bank will maintain the level of purchases until March, according to the median estimate of 40 economists in a Bloomberg survey conducted Oct. 17-18. A survey last month forecast the first reduction would be in December.

The forecasters pushed out their projections following the partial government shutdown, which they estimated reduced growth by 0.3 percentage point this quarter.

“From the Fed’s standpoint, this morning’s report reaffirms their position to hold monthly asset purchases steady,” Lindsey Piegza, chief economist at Sterne Agee & Lynch Inc. in Chicago, wrote in a report. Today’s employment data “essentially takes tapering off the table for October and likely December as well.”

The Fed’s next two policy meetings are scheduled for Oct. 29-30 and Dec. 17-18.

The government reopened on Oct. 17 after a last-minute deal funded operations through Jan. 15 and extended the nation’s borrowing authority to Feb. 7, from Oct. 17, averting a potential default.

Currency Performance

The euro has risen 6.2 percent this year in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the best performance. The dollar has advanced 1.1 percent, while the yen has tumbled 12 percent in the biggest loss, the indexes show.

The euro will trade at $1.33 at year-end and at $1.29 in mid-2014, according to the median forecast in a Bloomberg survey of economists and analysts.

Trading in over-the-counter foreign-exchange options totaled $57 billion, from $37 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 $10.9 billion, the largest share of trades at 19 percent. Options on the euro-dollar rate totaled $9.9 billion, or 17 percent.

Dollar-yen options trading was 111 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 209 percent above average.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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