Dollar Weakens as Fed Minutes Suggest More Bond Buying

Euro Trades Near Two-Month Low Before Industrial Production Data
The euro traded at $1.2703 at 8:15 a.m. in Tokyo from $1.2704 at the close yesterday, when it touched $1.2662, the weakest level since Sept. 7. The shared currency fetched 100.93 yen from 100.84, after declining for five days. Photographer: Kiyoshi Ota/Bloomberg

The dollar fell the most versus the euro in two weeks after the minutes from the latest Federal Reserve meeting showed a number of officials favored additional monetary stimulus next year.

The Dollar Index fluctuated on concern an expansion of the Fed’s monthly purchase of bonds may undermine the currency. The yen fell the most in eight months against the dollar amid speculation the opposition political party will win power and pressure the central bank into a more aggressive easing policy. The pound fell after the Bank of England lowered its growth forecasts.

“We’ve tempered the potential for dollar gains,” said Brian Kim, a currency strategist at Royal Bank of Scotland Plc’s RBS Securities unit in Stamford, Connecticut. “We are baking in that there will be easing over the course of next year, even with the U.S. growth story.”

The dollar fell as much as 0.6 percent to $1.2778, the biggest decline since Oct. 30, before trading down 0.3 percent at $1.2736 as of 5 p.m. New York time. The yen tumbled 1.1 percent to 80.25 per dollar after declining 1.2 percent, matching the biggest drop since March 9. The Japanese currency fell 1.4 percent to 102.20 per euro after dropping 1.6 percent, the largest decline against the common currency since Sept. 14.

The Dollar Index, which tracks the greenback versus six major peers, rose for a sixth day, gaining 0.1 percent to 81.140.

FOMC Minutes

A number of Fed officials said the central bank may need to expand its monthly purchases of bonds after the December expiration of what’s become known as Operation Twist, according to minutes of their October meeting.

The Fed is swapping short-term Treasuries on its balance sheet for longer-term debt. The central bank in addition is buying $40 billion in mortgage-backed securities in a third round of so-called quantitative easing aimed at fueling economic growth and reducing unemployment.

Fed Vice Chairman Janet Yellen joined three other Fed officials who have endorsed tying zero interest rates with progress on fighting unemployment as a way to provide more clarity on the central bank’s outlook for monetary policy.

South Korea’s won rose against all its major counterparts and climbed to a 14-month high against the greenback. Bank of Korea Governor Kim Choong Soo said at a forum in Seoul today domestic economic growth will “bounce back” next year as global conditions improve. The won gained 0.4 percent to 1,085.05 per dollar.

New Zealand’s dollar weakened against most of its major counterparts after retail sales in the South Pacific nation dropped 0.4 percent in the third quarter, compared to a forecast rise of 0.4 percent.

Key Support

The kiwi, nicknamed for the image of the flightless bird on its one dollar coin, has risen 4.3 percent this year against the U.S. currency. It fell 0.7 percent to 81.02 U.S. cents after dropping as much as 0.9 percent.

The South Pacific currency may fall to 79.15, its lowest level since Sept. 5, if it declines past the key support area from 80.77 to 81, Niall O’Connor, a New York-based technical analyst at JPMorgan Chase & Co., wrote today in a note to clients. The kiwi tested and failed to rise past 82.50 last week, which pushed it back down toward the support range, he said. Support refers to an area on a chart where buy orders may be gathered.

The BOJ increased its asset-purchase program by 11 trillion yen to 66 trillion yen ($822 billion) on Oct. 30, saying the central bank and the government will make the “utmost” efforts to overcome deflation. Governor Masaaki Shirakawa and his board next meet on Nov. 19-20.

‘More Aggressive’

Speaking in Japan’s parliament a day after the Democratic Party of Japan agreed with the two main opposition parties on legislation to fund the rest of this year’s budget, Noda said he would dissolve the lower house on Nov. 16 if a deal is reached to cut the number of lawmakers in the chamber. Shinzo Abe, head of the Liberal Democratic Party and a former prime minister, said he agreed.

“The fundamental backdrop for dollar-yen is becoming more conducive to yen weakness,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen. “Now that the BOJ is looking to become more aggressive, we think, as a result of the political dynamics in Japan, that would mean interest-rate differentials would start to push against the yen.”

Pound Falls

A stronger yen makes Japanese products costlier overseas, reducing the competitiveness of domestic exporters, while it cuts the value of income earned abroad when repatriated. The yen is 6 percent from its post-World War II record high of 75.35 against the dollar reached Oct. 31, 2011.

Sterling slipped 0.4 percent to 80.40 pence per euro, after reaching 80.49 pence, the weakest level since Oct. 31 after the Bank of England said the U.K. economy may shrink in the current quarter.

“The weaker gross domestic product profile reflects the judgment that the broader causes and repercussions of the financial crisis may bear down more forcefully on demand and productivity than assumed” previously, the central bank said in its quarterly Inflation Report published in London today. “There seems a greater risk that the U.K. economy may be in a period of persistent low growth.”

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