Dollar Drops on Forecast for Extended Fed Stimulus

The dollar fell versus most of its major peers before a policy statement from the Federal Reserve, which is forecast to maintain its monthly asset purchases.

The Bloomberg U.S. Dollar Index snapped a three-day gain as companies added fewer workers than projected in October and inflation rose the least since April. The Fed will maintain purchases of Treasuries at $45 billion and mortgage-backed securities at $40 billion, according to economists surveyed by Bloomberg. The euro rose for a fifth day versus the yen after Spain exited a two-year recession. Brazil’s real dropped.

“The data that came in this morning was weaker than expected,” Sireen Harajli, a foreign-exchange strategist at Mizuho Bank in New York, said in a phone interview. “There’s no strong case to see any kind of Fed action from now until next year. It confirms the dovish tone for the Fed.”

The dollar weakened 0.2 percent to $1.3766 per euro at 12:51 p.m. New York time. The shared currency rose 0.2 percent to 135.21 yen. The dollar was little changed at 98.22 yen.

The greenback has lost 1.7 percent this month versus the euro and has slid 4.2 percent year-to-date. Against the yen, the U.S. currency has been little changed this month and has appreciated 13 percent since the start of 2013.

Bloomberg’s dollar gauge, which monitors the currency against 10 major counterparts, fell 0.2 percent to 1,004.40 after rising 0.4 percent yesterday, the most since Sept. 5.

Higher Volatility

A measure of price swings among the currencies of Group of Seven nations has increased this week. The JPMorgan G7 Volatility Index rose to as high as 7.84 percent today after sliding to 7.48 percent Oct. 28, the lowest since Dec. 21. The 2013 average is 9.38 percent.

Brazil’s real declined versus most major peers as slower-than-forecast inflation damped speculation the country’s central bank will raise borrowing costs next month. The currency was little changed at 2.1832 to the greenback after weakening earlier as much as 0.4 percent.

The Indonesian rupiah sank versus all of its 31 most-traded counterparts on speculation companies stepped up dollar purchases to meet month-end payments. It decreased 0.6 percent to 11,175 per dollar after earlier sliding 1 percent, the most since Sept. 30.

New Zealand’s dollar was little changed at 82.59 U.S. cents after Moody’s Investors Service Senior Vice President Steven Hess said the company discussed stripping the country of its sole remaining top credit rating amid concern the nation’s current-account deficit is exacerbating its vulnerability to external shocks. The currency, nicknamed the kiwi, dropped earlier as much as 0.5 percent and strengthened 0.4 percent.

Fed Stimulus

The Fed will wait until its March meeting to slow its $85 billion of monthly bond buying, according to a Bloomberg News survey of economists on Oct. 17-18. The purchases, made to push down long-term yields and spur growth, tend to debase the dollar. Policy makers refrained from slowing stimulus last month to await further evidence of economic recovery.

“With expectations having settled on March or April for the start of tapering, there’s little reason for the Fed to stick its neck out today,” said Adam Cole, head of Group-of-10 currency strategy at Royal Bank of Canada in London. “The bulk of currency managers’ positioning is still located in long dollar-yen positions. That doesn’t mean those positions have to unwind but that is a risk as we get to year-end.” Long positions are bets currencies will gain in value.

The dollar will decline to 92 yen by year-end, he forecast.

U.S. Economy

American companies boosted payrolls by 130,000 in October, figures from Roseland, New Jersey-based ADP Research Institute showed today. Economists surveyed by Bloomberg called for an advance of 150,000.

The cost of living in the U.S. rose 1.2 percent in September from a year earlier, the smallest increase since April, after advancing 1.5 percent in August. The Fed’s target inflation rate is 2 percent.

The dollar will face an “interesting test” if the Fed’s post-meeting statement suggests tapering could be delayed further into 2014, David de Garis, a senior economist at National Australia Bank Ltd. in Melbourne, wrote today in a research note.

The euro strengthened versus the yen after Spain’s National Statistics Institute said gross domestic product grew 0.1 percent in the third quarter compared with the previous three months, when it declined 0.1 percent. A separate report showed economic confidence in the euro-area rose more in October than analysts forecast, adding to signs the region’s recovery is gaining momentum.

Krone Gains

The Norwegian krone gained versus most major peers, advancing for a second day versus the dollar after Norges Bank Governor Oeystein Olsen said he’ll avoid policies that drive up the property market.

“The comments remove one of the big obstacles for the Norwegian krone,” Morten Helt, a senior analyst at Danske Bank A/S in Copenhagen, wrote in a note to clients. “The risk of Norges Bank turning even more dovish than they already are should be relatively small.”

The krone gained 0.3 percent to 5.8807 per dollar and rose 0.1 percent to 8.0965 per euro.

Trading in over-the-counter foreign-exchange options totaled $28 billion, from $48 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 $7 billion, the largest share of trades at 25 percent. Options on the dollar-Chinese-yuan rate totaled $5.2 billion, or 19 percent.

Greenback-yen options trading was 20 percent more than the average for the past five Wednesdays at a similar time in the day, according to Bloomberg analysis. Dollar-yuan options trading was 110 percent above average.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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

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