Dollar Rises Most Since May as Taper Fuels Emerging-Markets Rout

The dollar had its biggest monthly gain against a basket of peers since May as a global selloff of emerging-market currencies prompted investors to seek the relative safety of haven assets.

The yen gained versus the dollar for the first time in six months as the global rout spurred investors to reverse carry trades. The Argentine peso and Hungary’s forint were January’s two biggest emerging-market losers. The greenback climbed versus all 31 major peers except the yen as the Federal Reserve scaled back monthly bond purchases a second time, citing labor-market improvements. U.S. payrolls gains more than doubled last month, according to a Bloomberg survey before next week’s report.

“The dollar has benefited from the broad-based flight out of risk assets and into safer ones,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said yesterday in a phone interview. “That we didn’t really get even an acknowledgment of the selloff in emerging markets by the Fed shows that it sees little risk of contagion at this point, which is also dollar-positive.”

The Bloomberg Dollar Spot Index, which monitors the greenback against 10 major counterparts, climbed 1.2 percent in January to 1,031.57 in New York. The dollar appreciated 1.9 percent to $1.3486 per euro and touched $1.3479 yesterday, its strongest level since Nov. 22. The U.S. currency dropped 3.1 percent to 102.04 yen, the biggest slump since April 2012. The Japanese currency rose 5.2 percent to 137.63 per euro.

EM Selloff

The MSCI All-Country World Index (SPX) tumbled 4.1 percent in January and the Standard & Poor’s 500 Index slid 3.6 percent. Benchmark U.S. 10-year Treasury notes rose, pushing yields down 38 basis points, or 0.38 percentage point, to 2.64 percent, the lowest closing level since Nov. 7.

Emerging-market currencies continued a slump initially spurred by anti-government protests from Ukraine to Thailand and deepened by the Jan. 23 devaluation of Argentina’s peso, which dented confidence throughout Latin America. The peso fell 13 percent that day and 19 percent for the month.

A custom Bloomberg index with equal weightings of the dollar’s 20 most-traded emerging-market peers has declined in 14 of the past 15 days and slipped 3 percent last month.

The Hungarian forint led all emerging-market decliners this week as Gyula Pleschinger, a member of the central bank’s Monetary Council, said on Jan. 29 that the currency has depreciated “too fast, too big” and that the central bank is monitoring its move and the market environment. The currency slipped 3.8 percent this week, pushing its monthly drop to 6.6 percent.

Zloty, Ruble

Poland zloty was the second-biggest decliner this week, falling 2.7 percent to extend its monthly decline to 4.1 percent. Russia’s ruble posted gains on just four days last month as it sunk 6.5 percent.

The Turkish lira rose this week versus all of its 174 global peers except the Malawian kwacha, gaining 3.6 percent against the greenback, after its central bank more than doubled interest rates. Still, it plummeted 4.8 percent on the month.

“The selloff in emerging markets is encouraging money to divest into developed markets, where the dollar is a beneficiary of that,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc, said in a Jan. 30 phone interview. “What’s going on in EM is certainly the larger driver of foreign-exchange markets right now.”

Fed Taper

The Fed announced on Jan. 29 that it will trim its monthly bond buying by $10 billion to $65 billion, sticking to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy. It has undertaken three rounds of bond buying since 2008 under the quantitative-easing stimulus strategy, swelling its balance sheet to a record $4.1 trillion.

The central bank had been forecast to continue reducing purchases by $10 billion at this meeting and each one following to end the stimulus program this year, according to analysts in a Jan. 10 Bloomberg News survey.

“From the point of view of emerging markets, the Fed has just said ‘hasta la vista, baby,’” Steven Englander, global head of Group of 10 foreign-exchange strategy at Citigroup Inc., wrote in a Jan. 29 e-mail. “There is modest disappointment in” riskier currencies.

Nonfarm payrolls rose 180,000 in January, according to the median forecast of 71 economists in a Bloomberg survey, after adding 74,000 the prior month. A separate survey predicts the unemployment rate will hold steady at 6.7 percent when the reports are released Feb. 7.

Yen ‘Support’

The yen was boosted yesterday by a report showing that Japan’s December core consumer prices rose 1.3 percent from a year earlier, compared with the median estimate for a 1.2 percent gain in a Bloomberg News survey.

An equally weighted basket of the so-called BRICS emerging-market currencies, consisting of Brazil, Russia, India, China and South Africa, fell against the yen to its lowest level since Nov. 13.

Hedge funds and other large speculators trimmed bets the yen will weaken versus the dollar, according to data from the Commodity Futures Trading Commission. The difference in the number of wagers on a decline in the currency compared with those on a gain -- so-called net shorts -- was 86,192 as of Jan. 28, compared with 114,961 a week earlier.

“Better Japanese data suggests reduced chance of more Bank of Japan easing this spring,” Jane Foley, senior currency strategist at Rabobank International in London, said in an interview yesterday. “The trouble in emerging markets could also remain a factor for some weeks and that should provide some support for the yen in the near term.”

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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