The dollar traded near an eight-month low against the euro on speculation that Federal Reserve policy makers will this week signal their willingness to buy more government debt to support economic growth.
The dollar touched a 15-year low versus the yen before tomorrow’s release of minutes from the Fed’s Sept. 21 policy meeting. The euro pared gains against the U.S. currency after authorities failed to narrow differences over exchange-rate policies at the International Monetary Fund’s annual meeting.
“Given there was little suggestion of coordination or cooperation at the IMF meeting, the fact that the euro hasn’t continued to go higher on the back of that suggests caution,” said Ian Stannard, a senior currency strategist at BNP Paribas SA in London. “The euro may be a little overextended and we may see a little bit of a correction set in from these levels.”
The U.S. currency was unchanged from Oct. 8 at $1.3939 per euro as of 8:30 a.m. in New York. It fell to $1.4012 earlier today and reached $1.4029 on Oct. 7, the weakest since Jan. 28. The dollar traded at 81.89 yen, from 81.93 yen last week, after earlier reaching 81.39 yen, the lowest level since April 1995. The euro was little changed against yen at 114.16, from 114.19 yen. Financial markets in Japan and bond markets in the U.S. are closed for public holidays today.
U.S. Data, Fed
U.S. employers cut payrolls by 95,000 workers in September after a revised 57,000 decrease in August, Labor Department figures in Washington showed on Oct. 8. The median forecast of 87 economists surveyed by Bloomberg News called for a 5,000 drop. The unemployment rate unexpectedly held at 9.6 percent.
Fed Chairman Ben S. Bernanke said on Oct. 4 that the central bank’s first round of large-scale asset purchases aided the economy and that further quantitative easing, or QE, is likely to help more.
“Since August, the Fed has been leaning towards more quantitative easing measures to underpin the weakened U.S. recovery,” Philip Wee, a senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note today. “We have downgraded the outlook for the dollar.”
DBS lowered its year-end forecast for the dollar to trade at $1.40 per euro from $1.28 previously, and to be at 83 yen from 88 yen before, according to the note.
“Risk-taking appetite may be positive, given higher equities and commodities,” said Yusuke Tanaka, a senior dealer at Bank of Tokyo-Mitsubishi UFJ Ltd. in Singapore. “This is probably a plus for the euro.”
The dollar’s biggest quarterly decline in eight years may be setting the stage for a rally, according to BNP Paribas SA.
The Dollar Index, which tracks the U.S. currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, slid 8.5 percent last quarter, the most since June 2002, and 1.8 percent this month as Bernanke signaled he may inject more money into the economy to ensure the recovery stays on track. That new supply is reflected in exchange rates, based on how the currency reacted to the last round of quantitative easing.
“The market will find it has been selling the rumor and will rush to buy the fact,” when the Fed begins fresh purchases, said Hans-Guenter Redeker, global head of currency research in London. “Everybody sits in the same boat and is heavily negative on the dollar. When too many people are sitting in a boat it’s no longer safe.”
Commodity Futures Trading Commission data show hedge funds and other large speculators are more bearish on the dollar than at any time in history, with bets on a decline exceeding those on a rise by 341,683 contracts as of Oct. 5.
The last two times sentiment was close to this level, in early 2008 and late 2009, the dollar rallied. The Dollar Index surged as much as 24 percent in the second half of 2008 and 19.6 percent between November 2009 and June 2010.
“The pain trade now is any dollar-positive, or very likely U.S. bond-market-negative, news,” Citigroup Inc. strategists led by Steven Englander in New York wrote in an Oct. 7 report. The strategists said they are still calling for dollar weakness.
The pound weakened against 12 of its 16 most-traded peers before a measure of U.K. inflation is released tomorrow and as investors speculate the Bank of England may restart its asset-purchase program to bolster the economic recovery.
U.K. Consumer Prices
U.K. consumer prices rose by 3.1 percent in September from a year earlier, according to the median estimate of 31 economists in a Bloomberg News survey. The persistence of accelerating inflation may exacerbate a split on the Bank of England’s Monetary Policy Committee, where Andrew Sentance has argued for an interest-rate increase to tame prices while other officials such as Adam Posen say more stimulus may be needed.
The pound depreciated as much as 0.6 percent, and traded 0.2 percent weaker at 87.47 per euro, near a five-month low. It weakened 0.1 percent against the dollar and yen, to $1.5943 and 130.65 yen respectively.
Gains in the yen were tempered on speculation that Japan will intervene to stem the appreciation of its currency.
Japanese Finance Minister Yoshihiko Noda said on Oct. 8 Group of Seven officials understand Japan’s position on the yen’s gains and agreed that excessive foreign-exchange movements are undesirable.
‘No Official Criticism’
“There was no official criticism of Japan’s decision to intervene in the foreign-exchange market by selling yen,” said Gareth Berry, a currency strategist at UBS AG in Singapore. “This increases the chance of a further round of intervention should the yen continue to appreciate.”
At the IMF’s meeting in Washington, governments tasked the agency with calming the recent outbreak of tensions over currencies amid signs they are already triggering a protectionist backlash. Officials including U.S. Treasury Secretary Timothy F. Geithner and Egyptian Finance Minister Youssef Boutros-Ghali said Oct. 10 the lender should outline how countries can expand their economies without damaging those of other nations.
The dollar may decline this week as currency-market “pressures” intensify after the IMF meeting, Bank of New York Mellon Corp. said.
“Heightened dollar weakness, increased capital flows into emerging markets, increased intervention (possibly from Japan as well) and diversification will be the order of the day,” Simon Derrick, the bank’s chief currency strategist in London, said today in an e-mailed note.
“Battle lines” between the U.S. and China on currency policy “are becoming ever more clearly defined,” Derrick wrote, meaning “the likelihood of an agreement being reached by early November seems very low.”
The Australian dollar erased an earlier advance versus its U.S. counterpart after China raised the deposit reserve ratio for six banks by 50 basis points.
The so-called Aussie “dropped from the overnight high with the rate announcement from China depressing demand,” analysts at Lloyds Banking Group Plc, led by Kenneth Broux in London, wrote in an e-mailed report.
Australia’s currency fell 0.1 percent to 98.43 U.S. cents. The Aussie strengthened to 99.07 U.S. cents earlier after home-loan approvals climbed for a second-straight month. It reached a record 99.18 cents on Oct. 7, the highest level since it began trading freely in 1983.