Dollar Drops Most in 11 Months as Fed Follows ECB With Stimulus

The dollar fell by the most in 11 months against the euro after the Federal Reserve said it would start a third round of asset purchases to boost the economy, which tends to debase the currency.

The greenback completed its longest stretch of weekly losses against the 17-nation currency since October 2010 after the European Central Bank said last week it would purchase bonds to address the region’s debt crisis. The dollar touched its lowest level in seven months against the yen before Japanese officials signaled they are ready to intervene to stem the currency’s strength. The Bank of Japan holds a policy meeting Sept. 19.

“The shift in the policy statement from the Fed was a welcomed surprise for risk-loving investors,” said Andrew Wilkinson, chief economic strategist at Miller Tabak in New York. “The other driver behind the scenes is the ECB, which has launched the boldest action in defense of the euro.”

Wilkinson said he expects the euro to rally to $1.3450 by year-end.

The U.S. currency fell 2.5 percent this week to $1.3130, after reaching a four-month low of $1.3169 yesterday. It rose 0.2 percent to 78.39 yen, after touching 77.13 on Sept. 13, the least since Feb. 9. The euro added 2.7 percent to 102.93 yen.

Dollar Bears

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 U.S. currency fell 1.3 percent this week versus the currencies of nine developed nation counterparts, according to the Bloomberg Correlation-Weighted Indexes. The yen had the biggest decline with 1.5 percent.

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, declined for a fourth week. The 1.8 percent loss is the biggest since October 2011. It fell to 78.851 after touching 78.601, the lowest since Feb. 29.

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 Federal Open Market Committee 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.

Liquid Markets

Anticipation of additional liquidity from the bond-buying program pushed the Australian currency, where interest rates are 3.5 percent, to a one-month high of $1.0625 versus the greenback. New Zealand’s dollar rallied to a six-month high of 83.54 U.S. cents.

The shared currency was buoyed against major counterparts as ECB President Mario Draghi said last week that policy makers agreed on an unlimited debt-buying program to address region’s debt crisis. A German court dismissed motions this week seeking to block the region’s bailout fund, while setting a cap of about 190 billion euros ($249 billion).

“The ECB actions were expected by the markets; it is helping the market to move away from two key risks, namely the financing of the U.S. and peripheral risks in Europe,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York said Sept. 13.

The cost of options granting the right to buy the euro against the Swiss franc climbed above the price allowing for sales for the first time since April 4. So-called three-month 25-delta risk reversal rate climbed to three basis points, or 0.03 percentage point, yesterday.

Bank Cap

The Swiss National Bank put a cap of 1.20 per euro on the franc in September 2011 to limit its strength after investors sought the currency as a refuge from the euro-area’s debt crisis.

The euro’s rally versus the dollar may stall as the 14-day relative strength index for the shared currency versus the greenback surged to 79.1. A reading of more than 70 indicates an asset may have moved too far, too quickly and may be due for a correction.

The yen fell against a majority of its 16 most-traded peers after Finance Minister Jun Azumi signaled he’s ready to intervene to weaken the currency.

Japan’s Azumi told reporters yesterday that he’ll take “decisive action,” if necessary. 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.

Speculative Trades

Vice Finance Minister Takehiko Nakao told reporters in Tokyo on Sept. 13 the recent surge in the yen against the dollar has been “obviously speculative” and that Japan can’t overlook such moves.

There are “heightened intervention concerns, an easing of safe-haven demand for yen, and building expectations that the Bank of Japan, under increasing government pressure, may ease monetary policy next week,” Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said yesterday.

The rand fell against all of the most-traded currencies tracked by Bloomberg as unrest in South Africa’s mining industry outweighed Fed stimulus measures. Workers at mines are holding illegal protests to demand higher pay, causing their companies to lose thousands of ounces of production each day.

The currency of Africa’s largest economy weakened against major currencies, falling 0.4 percent to 8.2059 per dollar.

Russia’s ruble had the biggest advance against the dollar among major global currencies after the country’s central bank raised the refinancing rate to 8.25 percent from 8 percent, the first increase since April 2011.

The currency rose 3.8 percent to 30.4579 per dollar.

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