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Dollar Rises on Speculation Fed Will Limit Quantitative Easing

Oct. 27 (Bloomberg) -- The dollar advanced against all of its most-traded counterparts as stocks and longer-term Treasuries fell on speculation the Federal Reserve will buy less debt than some traders estimated under quantitative easing.

The euro fell almost one cent versus the dollar after Greece said tax revenue is falling short of a government goal and talks on Portugal’s 2011 budget broke down. South Korea’s won and South Africa’s rand were among the biggest losers as the nations signaled they may act to slow gains in their currencies.

“We’re seeing the dollar pull back from its lows of last week,” said John Doyle, a strategist at the currency-trading firm Tempus Consulting Inc. in Washington. “The market is scaling back expectations. We’re seeing a more gradual approach to quantitative easing.”

The dollar appreciated as much as 0.9 percent to $1.3734 per euro, the strongest level since Oct. 20, before trading at $1.3769 at 5 p.m. in New York, compared with $1.3859 yesterday. The dollar climbed 0.4 percent to 81.75 yen, from 81.43, after falling on Oct. 25 to 80.41 yen, the lowest level since April 1995. The euro slid 0.3 percent to 112.58 yen.

The MSCI World Index fell 0.8 percent, the Standard & Poor’s 500 Index dropped 0.3 percent, and the yield on the 10-year Treasury note rose 0.08 percentage point to 2.72 percent.

South Korea’s won declined 1 percent to 1,128.24 versus the dollar after Bank of Korea Governor Kim Choong Soo said four days after the Group of 20 pledged to soothe trade tensions in the $4 trillion-a-day foreign-exchange market that measures to mitigate capital flows may be “useful.”

Weaker Rand

The rand slid as much as 1.9 percent to 7.0781 against the dollar in the biggest intraday decline since June 24 as South African Finance Minister Pravin Gordhan said the government will use higher-than-expected tax revenue to boost purchases of foreign exchange as a means of weakening the currency.

Malaysia’s ringgit slid 0.4 percent to 3.1065 per dollar as Bank Negara Malaysia Governor Zeti Akhtar Aziz said in an interview on Bloomberg Television that policy makers don’t want to see “sudden movements.” The currency has appreciated more than 10 percent this year, a gain second only to the Thai baht’s among Asia’s most-traded currencies excluding the yen.

New Zealand’s dollar dropped 0.5 percent to 74.54 U.S. cents and slid 0.1 percent to 60.92 yen as the central bank held its official cash rate at 3 percent.

Yen’s October Gain

The yen has gained 2.1 percent in October in the biggest increase against the dollar among major currencies. Six weeks ago the Bank of Japan acknowledged intervening to curb the currency’s rally and protect exporters. The Brazilian real has dropped the most this month, falling 2 percent to 1.7214 as the government raised taxes on foreigners’ fixed-income purchases.

The Dollar Index increased 0.5 percent to 78.096 as investors pared bets on how much that Fed policy will debase the currency. IntercontinentalExchange Inc.’s gauge of the greenback against the currencies of six U.S. trading partners including the euro, yen and pound has climbed 1.4 percent since reaching 76.144 on Oct. 15, the lowest level since Dec. 11.

“The dollar strength or weakness is going to simply be a barometer of the market’s assumptions around quantitative easing,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “The market is likely to keep pulling back on risk. Currently that risk takes the state of short U.S. dollar positions in a relatively extreme way.” A short is a bet a currency will decline.

Fed Outlook

The Fed is likely to announce a program of bond purchases worth a few hundred billion dollars over several months, the Wall Street Journal reported, without saying where it obtained the information. Officials want flexibility in the new program to gauge if it’s working, the Journal said.

Estimates for the ultimate size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch to $2 trillion at Goldman Sachs Group Inc., with economists at both firms agreeing the Fed will likely start by announcing $500 billion after its Nov. 2-3 meeting.

The Fed’s “uncontrolled” issuance of dollars is adding to inflation risks in China and creating difficulties for the nation’s businesses, the state-run Xinhua News Agency cited Chinese Commerce Minister Chen Deming as saying yesterday.

The dollar rose yesterday against the euro for the first time in three days on speculation an increase in debt purchases by the Fed will cause U.S. inflation to accelerate.

‘Upward Pressure’

“If we do start to see continued upward pressure on inflation, that will definitely help the dollar,” said Doyle of Tempus Consulting.

The difference between yields on U.S. 10-year notes and inflation-linked debt, a gauge of consumer price expectations during the life of the maturity known as the break-even rate, rose to 2.20 percentage points, the highest since May 18.

The euro slid versus the dollar on evidence the currency region’s sovereign-debt crisis isn’t over. Greece’s Finance Minister George Papaconstantinou said a tax-revenue shortfall is hampering government efforts to reduce the deficit, while Portugal’s government and the main opposition party broke off talks on the biggest budget cuts since at least the 1970s.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

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

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