Dollar Falls to 4-Month Low Versus Euro on Fed; Yen Lower

The dollar fell to a four-month low against the euro on Federal Reserve Chairman Ben S. Bernanke’s plan to conduct open-ended quantitative easing, a process that tends to debase the U.S. currency.

The U.S. currency was set for the longest stretch of weekly of losses against the 17-nation euro since October 2010 amid the new round of monetary stimulus. The yen fell against all of its 16 most-traded peers after Finance Minister Jun Azumi signaled he’s ready to intervene to weaken the currency. The Swedish krona fell after quarterly economic growth was revised down.

“The fact that the Fed has instated an open-ended purchase of assets is driving risk appetite,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “QE is negative for the local currency, which is why we’re seeing the dollar weaker across the board.”

The dollar fell 1.1 percent to $1.3130 per euro at 5 p.m. New York time, after touching $1.3169, the weakest level since May 4. The yen dropped 1.2 percent to 78.39 per dollar after strengthening to 77.13 yesterday, a level unseen since Feb. 9. The euro climbed 2.2 percent to 102.93 yen, after reaching 103.02, the highest since May 14.

Position Data

Futures traders boosted aggregate bets the dollar would fall against eight major currencies to a 13-month high. Net-bets for a dollar decline were 228,176 in the week ended Sept. 11, up 72 percent from 132,997 the previous week, according to Commodity Futures Trading Commission data compiled by Bloomberg. That is the highest since Aug. 5, 2011.

The greenback posted its fifth straight weekly decline against the euro, losing 2.5 percent. The euro has risen 2.7 percent against Japan’s currency.

The euro rose for a fourth day against the greenback as Europe’s finance ministers and central-bank officials gathered in Cyprus for a two-day meeting starting today to discuss the next steps in addressing the region’s sovereign-debt crisis. European Central Bank President Mario Draghi said last week that policy makers agreed on an unlimited debt-buying program to address region’s debt crisis.

The 17-nation currency’s 14-day relative strength index climbed to 79.72, its fourth straight daily increase, after exceeding 70 on Sept. 11. A reading above 70 signals an asset may have rallied too far, too quickly and is due for a correction.

Euro Forecasts

Morgan Stanley raised its year-end forecast for the euro to $1.34 from $1.19, while Credit Suisse Group AG increased its three-month projection to $1.23 from $1.17. The shared currency will finish the year at $1.23, according to the median forecast in a Bloomberg News survey of 48 analysts.

“The dollar is on a weaker trajectory going into the fiscal cliff,” Jane Foley, a senior currency strategist at Rabobank International in London, said in a radio interview on “Bloomberg - The First Word” with Ken Prewitt. “It’s the two-pronged impact of both a better tone in the euro zone and weak dollar action that’s really propelling euro-dollar right now.” The fiscal cliff refers to U.S. budget negotiations, including automatic tax increases and spending cuts that may be triggered pending deficit-reduction efforts.

Switzerland’s franc fell for a third day against the euro. The cost of options granting the right to buy the shared currency against the franc climbed above the price allowing for sales for the first time since April 4. The Swiss National Bank announced yesterday it would maintain its 1.20 limit against the shared currency.

The franc dropped 0.2 percent to 1.2175 per euro after earlier declining to 1.2178, its lowest level since Jan. 6.

Sweden’s Economy

The krona weakened against the euro after second quarter gross domestic product growth was revised down to an annual 1.3 percent from an earlier 2.3 percent estimate.

The krona fell 0.8 percent to 8.6050 per euro.

The Fed said it will expand its holdings of long-term securities with open-ended purchases of $40 billion a month of mortgage debt in a third round of quantitative easing. The U.S. central bank will continue buying assets, undertake additional purchases and employ other policy tools as appropriate “if the outlook for the labor market does not improve substantially,” the Federal Open Market Committee said yesterday in a statement.

The FOMC said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014.

Fed View

“There was some uncertainty whether the Fed would pull the trigger this month,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce¼in London. “While everyone knew it was coming, the timing was a little bit up in the air so it’s caused a bit of a reaction. There’s risk-on trading and the path of least resistance seems to be a dollar selloff. It’s tough to stand in the face of a weakening dollar trend.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, declined 0.5 percent to 78.852, after touching 78.601, the lowest since Feb. 29.

The gauge slumped as much as 19 percent as the Fed bought $2.3 trillion of mortgage and Treasury debt in the first two rounds of QE from December 2008 to June 2011.

Japan’s Azumi told reporters today that he’ll take “decisive action” if necessary. The FOMC decision reflects concern about the U.S. economy, which he’s watching “carefully,” he said.

Azumi ordered the Bank of Japan to sell yen in markets on Oct. 31 after the yen strengthened to a postwar record of 75.35 per dollar.

Yen Questions

The country’s Vice Finance Minister Takehiko Nakao declined to comment today on the yen.

“The stakes are raised for the BOJ meeting next week,” Mary Nicola, a New York-based currency strategist at BNP Paribas SA, said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen. “There’s going to be a lot of speculation that we could see some sort of reaction from the BOJ to do something on the monetary side so they can weaken the yen.”

The BOJ is unlikely to step in until the yen appreciates to 77 versus the greenback, according to Nomura’s St-Arnaud, who said the bank is “still relatively far away from intervention.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE