The dollar and yen rallied after Federal Reserve policy makers said they saw “significant downside risks” to the U.S. economy and Greece struggled to avoid default, spurring demand for refuge.
The 17-nation euro weakened as Group of 20 finance ministers met in Washington amid growing pressure to contain Europe’s sovereign debt crisis. Central banks of emerging market economies intervened to stem the decline of their currencies amid growing concern of a global slowdown and before a final report next week on Chinese manufacturing that may confirm preliminary data that showed slowing in September.
“It’s the triple blow of Greece teetering at the brink of default, the Federal Reserve talking about how the worst is yet to come and slower Chinese growth,” said Kathy Lien, director of currency research at the online currency trader GFT Forex, in New York. “Performance of the dollar and yen is really a reflection of how much desired safety investors need right now.”
The dollar rose 2.2 percent to $1.35 per euro, from 1.3796 on Sept. 16. Japan’s currency gained 0.2 percent to 76.61 yen per dollar, from 76.79. It advanced 2.4 percent against the shared currency to 103.40, from 105.95.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, touched 78.798 on Sept. 22, the highest level since Feb. 14.
Aggregate bets the dollar will strengthen against the euro, the yen, the Australian, Canadian and New Zealand dollars, the pound, the Swiss franc and the Mexican peso surged to 75,065 contracts in the week ended Sept. 20, according to Commodity Futures Trading Commission Data as compiled by Bloomberg. Foreign-exchange traders are net long the dollar for the first time since July 2010.
Price swings surged to a 16-month high with implied volatility for currencies of the Group of Seven nations reaching 15.5 yesterday, the highest since May 2010, a JPMorgan Chase & Co. index showed.
The yen has appreciated 11.2 percent during the past three months, the best performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency indexes. The dollar, the second-best performer, gained 5.3 percent while the euro has lost 0.9 percent.
Japan’s currency reached a decade-high of 102.22 versus the euro on Sept. 22. It traded as little as 0.3 percent from its post World War II record of 75.95 against the dollar, reached Aug. 19, as investors sought a haven.
Japan may outline measures to counter the strong yen as early as tomorrow, Economic Policy Minister Motohisa Furukawa signaled in remarks, Kyodo News reported. The package will be aimed at reducing the impact of the currency’s gains on local businesses, according to the report.
The franc fell against the euro by the most since the Swiss National Bank put a ceiling on its currency’s strength amid speculation on Sept. 20 the central bank may move the maximum level to 1.25 from 1.20 per euro.
Swiss central bank spokesman Walter Meier in Zurich declined to comment when asked about speculation that policy makers may adjust the franc ceiling against the euro.
The franc fell 1.1 percent to 1.22199 per euro, from 1.20861. The currency lost 7.7 percent the week ended Sept. 9, after the central bank instituted the 1.20 ceiling Sept. 6. It declined 3.4 percent to 90.57 centimes per dollar from 87.56.
The International Monetary Fund said the European Central Bank should lower interest rates if risks to growth persist. The ECB’s current benchmark rate is 1.5 percent.
The IMF also said the U.S. economy will expand 1.5 percent this year, down from the 2.5 percent projected in June, citing unresolved debt-reduction concerns and waning confidence among consumers and businesses.
The ECB may cut borrowing costs to 1 percent at the Oct. 6 meeting, Greg Fuzesi, an economist at JPMorgan in London, said in an e-mailed note on Sept. 23.
After a two-day meeting the Fed announced Sept. 21 it would 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, a move known as Operation Twist. The Fed will also reinvest maturing home-loan debt into mortgage-backed securities instead of Treasuries.
“The Fed believes the economy really needs some help, even though inflation is not zero,” said Andy Richman, who oversees $10 billion as a strategist in Palm Beach, Florida for SunTrust Bank’s private wealth management division. “The message is the Fed really things the economy needs help, and that is not comforting.”
The Greek finance ministry said a conference call this week with the European Union and the IMF was productive. The country is struggling to convince critics that it will be able to win a sixth tranche of loans to prevent default.
Greek two-year yields surged above 70 percent Sept. 23 and credit insurance prices on Greece indicated the chance of default at more than 90 percent.
“We are reacting, headline by headline, to the European situation,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy in New York at Deutsche Bank AG.
Officials in emerging markets from India to Korea have signaled a readiness to prop up their currencies as mounting concern about the global economy spurs losses.
Brazil’s real touched the weakest level since July 2009, reaching 1.9549 per dollar on Sept. 22. The real fell 5.8 percent to 1.8339 per dollar yesterday, from 1.7331 Sept. 16.
The real gained against the dollar after the central bank sold currency swap contracts in auctions Sept. 16, which is equivalent to selling dollars in the futures market. The move, meant to stem the decline of Brazil’s currency.
The Korean finance ministry said it would “take action” to stabilize the currency market, after holding an emergency meeting with the central bank before markets opened Sept. 23.
The won fell 5 percent to 1,167.31 per dollar.
“Every central bank in the world has to take a position right now where they have to protect their own economy and intervene in markets and manipulate interest rates,” said Greg Salvaggio, senior vice president of capital markets at currency-trading firm Tempus Consulting Inc in Washington.