The dollar fell against all of its 16 most-traded counterparts before the Federal Reserve starts a two-day meeting tomorrow amid speculation it will buy bonds to boost the economy.
The U.S. currency declined to its lowest level in almost four months versus the euro after Moody’s Investors Service said the country’s Aaa rating may be cut if it doesn’t reduce its ratio of debt to gross domestic product. The 17-nation euro gained after Germany’s top constitutional court said it will proceed with a ruling on the country’s role in the European Stability Mechanism bailout fund.
“The dollar is in a bad place right here,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “The atmosphere has shifted against it very quickly. A more accommodating Fed, diminished tail risk out of Europe and now this ratings downgrade risk add to the mix of negatives that are engulfing the dollar.”
The dollar fell 0.8 percent to $1.2855 at 5 p.m. New York time, touching the lowest level since May 14. The greenback slid 0.7 percent to 77.77 yen, reaching the weakest level since June 1. The euro rose 0.1 percent to 99.97 yen.
The euro may strengthen to a four-month high against the dollar, according to Bank of America Merrill Lynch. The 17-nation currency could appreciate to $1.2975 to $1.3000 if it closes above the key resistance level from $1.2830 to $1.2850, MacNeil Curry, chief rates and currencies technical strategist in New York at the firm, wrote to clients today.
The shared currency moved above its 200-day moving average of $1.2835 for the first time since Oct. 31.
The implied volatility of three-month options for Group of Seven currencies touched 7.81 percent, the lowest since October 2007, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.
Canada’s dollar strengthened for a fourth day, climbing to a 13-month high versus its U.S. counterpart, on optimism measures by policy makers in the U.S. and Europe will reduce volatility.
The loonie, as the currency is named after the image of the waterfowl on the C$1 coin, appreciated 0.5 percent to 97.30 cents per dollar. It touched 97.14, the strongest since Aug. 4, 2011.
New Zealand’s so-called kiwi advanced as Fitch affirmed the country’s AA rating, citing its strong governance and business environment. The kiwi rose 1.1 percent to 81.74 U.S. cents and added 0.4 percent to 63.56 yen.
BNP Paribas SA added a short trading position on the dollar versus its New Zealand counterpart. The greenback will depreciate to 84.70 cents against kiwi, Kiran Kowshik and Steven Saywell, London-based currency strategists at the firm, wrote today in a note to clients. BNP Paribas placed a stop for the trade at 79.65. A short position is a bet an asset will fall and a stop order is automatically triggered at a set price level.
The kiwi-dollar cross is “due for a catch-up with the performance of broader equity markets,” they wrote. “Of the commodity currencies, the New Zealand dollar stands out as being under-owned from a positioning perspective.”
The British pound rose to the strongest level in almost four months versus the dollar after a report showed the U.K. trade deficit shrank in July as exports soared, adding to signs the economy is emerging from recession.
Sterling gained 0.5 percent to $1.6070 after trading at $1.6084, the strongest since May 15.
The Federal Constitutional Court is due to decide tomorrow on Germany’s participation in the European Stability Mechanism, a 500 billion-euro ($639 billion) fund that offers loans to member states and may buy their bonds to lower borrowing costs.
A plaintiff in the case had asked for a delay after the European Central Bank last week pledged unlimited funds to buy euro-area government bonds as it seeks to tame the region’s sovereign-debt crisis. The bid won’t change the ruling date, the court said in an e-mailed statement today.
“Everybody is very anxious to see what decision we will get from the court,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “The most likely path is the German court ruling in favor of the ESM. Investors are also pricing in the probability of QE going forward.”
Moody’s, which placed a negative outlook on the U.S.’s Aaa grade in August, said in a statement today that the rating would likely be cut to Aa1 if no policy is passed to address a mounting debt to GDP ratio.
The U.S. currency declined before Fed policy makers gather. They will keep their key interest rate at 0.25 percent, according to all 54 economists surveyed by Bloomberg before the announcement on Sept. 13.
The dollar won’t depreciate as much following any potential monetary stimulus as it has in the past, according to Daniel Katzive, director of global foreign exchange research at Credit Suisse Group AG. The Fed bought $2.3 trillion of securities from 2008 to 2011 in two rounds of its quantitative-easing strategy.
“Global growth is less strong in this round of QE than it was in the previous two,” Katzive said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen. “You’re not going to get these big flows into emerging markets that tend to result in dollar-reserve accumulation and diversification away from the dollar.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, declined 0.6 percent to 79.888, after touching 79.794, the lowest since May 8.