The dollar jumped and currencies of commodity exporters tumbled on concern global growth is stalling after the Federal Reserve said yesterday it saw “significant downside risks” to the U.S. economy.
The Dollar Index climbed to a seven-month high as the Fed’s statement stoked concern the global economy is headed for a recession and currency volatility surged to a 16-month high. The euro reached a fresh decade-low against the yen after region’s services and manufacturing contracted. Brazil’s real erased losses against the dollar as the central bank sought to stem the decline.
“We’re seeing a disproportionate amount of buying in the dollar right now because there really is no other choice for a safe haven,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp. “Investors have finally recognized that the deterioration in the Group-of-Seven outlook is going to have negative consequences for emerging markets.”
The dollar appreciated 0.8 percent to $1.3465 per euro at 5 p.m. in New York, after reaching $1.3385, the strongest since Jan. 19. The yen strengthened 1.1 percent to 102.64 per euro, after reaching 102.22, the most since June 2001. Japan’s currency rose 0.3 percent to 76.24 per dollar.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, increased 1.4 percent to 78.447, after rising to 78.798, the highest level since Feb. 14.
Implied volatility for currencies of the Group of Seven nations advanced to 15.64, the highest since May 2010, a JPMorgan Chase & Co. index showed. One-month implied volatility for the euro-yen exchange rate jumped to 20.29, the highest since June 2010. It was at 14.16 at the beginning of the month.
Brazil’s real pared earlier losses as the central bank sought to stem the currency’s biggest five-day loss against the dollar since 1999 by selling dollars in the futures market. Concern policy makers’ surprise rate cut last month signals they are giving up on their goal of slowing inflation was compounding the real’s decline as Europe’s debt crisis erodes demand for emerging-market assets.
“Brazil has always been buying dollars to stem the strength of the real,” said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “This is a total risk-off moment and the emerging markets get hit the hardest, the commodity currencies get hammered.”
The real declined 1.6 percent to 1.9055 per dollar after falling as much as 4.2 percent to 1.9549.
The Standard & Poor’s 500 Index was down 3.2 percent, falling for the fourth day. Yields on Treasury 10-year notes declined to records as investors demanded the perceived safety of the debt and anticipated extra demand after the Fed said yesterday it will buy bonds due in six to 30 years through June while selling debt maturing in three years or less.
Commodities prices fell, with Standard & Poor’s GSCI index of 24 raw materials slumping 4.9 percent and erasing this year’s gains.
Canada’s dollar weakened to 2 percent to 1.0284, after touching the weakest level since May 2010.
The Australian dollar dropped below parity with its U.S. counterpart for the first time since Aug. 9 after an index from HSBC Holdings Plc and Markit Economics predicted China’s manufacturing may shrink for a third month in September, the longest contraction since 2009. China is Australia’s largest trading partner.
The Aussie slid 3 percent to 97.42 U.S. cents after falling to 96.92, the weakest since Dec. 2. New Zealand’s dollar sank 2.6 percent to 78.05 U.S. cents, a fourth straight day of losses against the greenback.
The New Zealand economy almost stalled last quarter, reinforcing the case for central bank Governor Alan Bollard to maintain record-low interest rates until 2012. Gross domestic product rose 0.1 percent in the three months through June from the previous quarter, a Statistics New Zealand report showed today in Wellington. The median estimate was for a 0.5 percent gain.
The U.S. central bank will extend the average maturities of the Treasuries in its portfolio by purchasing $400 billion of long-term debt, while selling an equal amount of shorter-term securities.
“The market intended to freak about the world being a scary place but was holding off to see if the Fed had some miracle, and it doesn’t, so therefore it’s time to re-price everything,” said Greg Anderson, a senior currency strategist at Citigroup Inc. in New York. “In a panic, people are always buying dollars because they are looking for cash.”
The seven-day relative strength index for the Dollar Index surged above the 70 for the first time in more than a week to 78. A reading over that level indicates an asset may have strengthened too quickly and may be due for a correction.
The Fed will also reinvest maturing home-loan debt into mortgage-backed securities instead of Treasuries. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the Federal Open Market Committee said.
“The market is piling into dollars big time,” said Chris Huddleston, a trader at Investec Bank Plc in London, which oversees about $95 billion in assets. “Equities are selling off and there’s a big move away from risk.”
The euro weakened for a fifth day against the yen after data showed euro-area services and manufacturing output shrank for the first time in more than two years in September as the region’s worsening debt crisis added to concern that the economy could slide back into a recession.
The 17-nation currency has declined 1.7 percent this year against the nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has gained 9.7 percent and the dollar has weakened 2.1 percent and.