The dollar fell for the first time in four weeks versus the euro after Federal Reserve Chairman Ben S. Bernanke said the economy still requires stimulus to bolster growth, upending trades that bet on less monetary easing.
Emerging-market currencies from South Africa’s rand to Mexico’s peso rallied on bets the Fed will sustain global liquidity. The greenback’s losses were tempered by speculation U.S. bond buying may still start to slow this year. The yen rose as the Bank of Japan refrained from adding additional stimulus. Bernanke is scheduled to testify to Congress next week.
“There is one big story and that is, of course, Bernanke,” Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co. in New York, said in a telephone interview. “The market was clearly leaning on the weak foreign currency, strong U.S.-dollar side, and Bernanke’s comments gave markets pause.”
The dollar slid 1.8 percent this week in New York to $1.3067 per euro, the biggest decline since the five days ended Jan. 11. It dropped 2 percent to 99.22 yen, the first weekly loss since June 14. The euro slipped 0.1 percent to 129.66 yen.
The Bloomberg Dollar Index, which tracks the greenback against 10 other major currencies, fell 1.6 percent to 1,037.637, the largest drop in more than a month.
Norway’s krone and the South African rand were the biggest winners this week among the U.S. currency’s 16 most-traded counterparts tracked by Bloomberg. The krone climbed 3.1 percent, and the rand rallied 2.2 percent. Mexico’s peso advanced 2 percent. Australia’s dollar and the Brazilian real were the worst performers, with the Aussie declining 0.2 percent and the real falling 0.7 percent.
The yen rose against most major peers as the BOJ increased its assessment of the economy by referring to a recovery for the first time since before an earthquake in March 2011. Policy makers stuck with their pledge to expand the monetary base by 60 trillion yen ($605 billion) to 70 trillion yen per year and said the economy was starting to improve moderately.
The dollar advanced against the euro for the past three weeks amid speculation the Fed will begin reducing its unprecedented monetary stimulus amid improvement in the economy.
The centra1 bank buys $85 billion of Treasuries and mortgage debt each month to put downward pressure on borrowing costs. The purchases tend to devalue the U.S. currency. Bernanke told reporters June 19 after a Fed meeting the buying may be pared this year and ended in 2014 if growth meets Fed forecasts.
The greenback dropped the most since January against the euro on July 10 after the Fed chief said in a question-answer session following a speech in Cambridge, Massachusetts, that “highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.”
U.S. unemployment, at 7.6 percent, hasn’t been below 7 percent since November 2008. The consumer price index is forecast to end the year at 1.5 percent, according to a Bloomberg survey. The Fed’s inflation target is 2 percent.
Bernanke is scheduled to deliver his semi-annual monetary policy report to Congress next week, starting July 17 at the House Financial Services Committee.
“Given that Bernanke’s comments rattled the market a couple times now in a short period of time, I think many traders are going to be loath to take significant positions ahead of that,” said Chandler of Brown Brothers.
Markets have been pricing in a tapering of purchases too aggressively because U.S. economic weakness is likely to continue through the third quarter, lower inflationary data may persist and reducing monetary stimulus may be left to another Fed chairman, Chandler said. Bernanke’s term expires in January.
Futures traders increased wagers that the dollar would rally against its major peers to a net $27.7 billion for the week ended July 9, the most since June 4, according to Commodity Futures Trading Commission data compiled by Societe Generale SA.
“The moves this week were particularly fierce and lot of people who were long dollar were wounded,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit, said by phone from Stamford, Connecticut. Long positions are bets an asset will rise in value. “People still want to be long dollar and want to own dollars, but positioning and liquidity and the comments from Bernanke have made the market quite choppy.”
Australia’s currency slid below 90 U.S. cents for the first time since September 2010 as traders bet the central bank will cut interest rates next month from a record low.
The Aussie dollar also weakened amid concern that economic growth in China, Australia’s biggest trade partner, is flagging. China’s gross domestic product expanded 7.5 percent in the second quarter, down from 7.7 percent in the first, a Bloomberg survey forecast before the nation reports the figure July 14.
The “Chinese data is getting a lot of attention,” RBS’s Daingerfield said. “I’d be surprised if people would try to put on risk going into the weekend given the Chinese release.”
Swaps data compiled by Bloomberg show traders see a 66 percent chance the Reserve Bank of Australia will cut its 2.75 percent benchmark rate to 2.5 percent at its meeting on Aug. 6.
The Aussie declined 0.2 percent to 90.90.49 U.S. cents and touched 89.99 cents.
The euro pared an advance against the dollar this week as France was downgraded and political turmoil in Portugal grew.
Fitch Ratings said yesterday it cut France’s credit rating by one step to AA+ from AAA, joining Moody’s Investors Service and Standard & Poor’s in removing France from the shrinking club of top-rated governments.
Portugal President Anibal Cavaco Silva said early elections were undesirable and urged the ruling coalition parties and main opposition to reach a “national salvation” pact.
European Central Bank President Mario Draghi pledged this month to keep borrowing costs low for an extended period. The ECB’s benchmark interest rate is a record-low 0.5 percent.