July 17 (Bloomberg) -- Mexico’s peso and Brazil’s real led a rally in emerging-market assets against the dollar as Federal Reserve Chairman Ben S. Bernanke signaled the U.S. economy still needs stimulus, boosting demand for higher-yielding securities.
The Bloomberg Dollar Index, which tracks the greenback against 10 other major currencies, pared gains after the Fed chief said in testimony to Congress that central-bank bond purchases “are by no means on a preset course.” Chile’s peso gained for a fifth day, the longest winning streak since January. U.S. Treasury 10-year yields fell to a two-week low. The dollar rose versus the yen and euro.
The “main trade has been lots of emerging markets are stronger as U.S. bond yields have come down,” said Alan Ruskin, the global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG in New York. “These positions are on versus a mix of U.S. dollar and euro, mainly.”
Mexico’s peso rallied 1.3 percent to 12.4595 to the dollar at 5 p.m. New York time. The Brazilian real strengthened 1.2 percent to 2.2261 per greenback after declining 0.5 percent earlier to 2.2645, and Chile’s currency appreciated 0.6 percent to 497.93 against the dollar.
The U.S. currency rose as much as 0.6 percent to $1.3083 per euro before trading at $1.3125, up 0.3 percent. The dollar rose 0.5 percent to 99.59 yen. Europe’s shared currency gained 0.2 percent to 130.69 yen.
Treasury 10-year note yields fell to as low as 2.46 percent, the least since July 3.
Swings in the greenback against the euro and yen amid Bernanke’s testimony to the House Financial Services Committee may have reflected technical issues in the market stemming from traders repositioning their portfolios, said Sebastien Galy, a foreign-exchange strategist at Societe Generale SA in New York.
“Some accounts had likely waited for the speech to run their operations in more liquid conditions,” Galy said. “The pressure is now gone.”
The Bloomberg Dollar Index was up 0.2 percent to 1,032.36, after gaining as much as 0.5 percent in its first advance in three days and dropping 0.1 percent to 1,029.34, the lowest level since June 21.
Bernanke’s testimony in his semi-annual report on monetary policy highlighted the Federal Open Market Committee’s desire to assure that the economy and labor markets have sufficient momentum before reducing its monthly bond purchases.
If the economy improved faster than expected, and inflation rose back “decisively” toward the central bank’s 2 percent target, “the pace of asset purchases could be reduced somewhat more quickly,” the 59-year-old Fed chairman said in testimony. The Fed would also be prepared to increase the pace of purchases “for a time, to promote a return to maximum employment in a context of price stability.”
Bernanke will testify to the Senate Banking Committee tomorrow.
The Fed buys $85 billion of Treasuries and mortgage debt each month as part of its third round of quantitative-easing stimulus to cap borrowing costs, a program that tends to debase the currency. It has held the benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy.
“The expectations were that he would clarify or specifically say when the Fed would start tempering, but that didn’t happen,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “He was slightly more hawkish on the tapering side, but on the flip side he seems to be more worried about the economy.”
The Fed’s Beige Book business survey said today the U.S. economy maintained a “modest to moderate pace” of growth in recent weeks, bolstered by industries from housing to manufacturing. The policy-setting FOMC next meets July 30-31.
JPMorgan Chase & Co.’s Global FX Volatility Index, a measure of currency fluctuations, declined to 10.11 percent, the lowest since June 6. It reached a one-year high of 11.96 percent on June 24.
An equally weighted basket of so-called BRICS emerging-market currencies rallied to the highest level versus the dollar since June 18. BRICS refers to Brazil, Russia, India, China and South Africa. The currencies gained after Bernanke signaled no imminent end to Fed bond buying.
The Mexican peso climbed versus all of its 16 most-traded counterparts after Bernanke’s testimony. The Brazilian real gained the second-most.
Sterling gained from a four-month low against the euro after minutes of the Bank of England’s July 3-4 meeting showed officials Paul Fisher and David Miles dropped their call to expand the central bank’s stimulus program and rallied to Governor Mark Carney’s policy of a “mixed strategy” involving guidance on the path of interest rates.
The pound appreciated 0.6 percent to 86.28 pence per euro after touching 87.11, the weakest level since March 13. Sterling gained 0.3 percent to $1.5212.
Trading in over-the-counter foreign-exchange options totaled $34 billion, compared with $27 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the Australian-U.S.-dollar exchange rate amounted to $5.9 billion, the largest share of trades at 17 percent. Dollar-Chinese-yuan options totaled $5.5 billion, or 16 percent, the second-largest share.
Dollar-yuan options trading was 4 percent above the average for the past five Wednesdays at a similar time in the day, according to Bloomberg analysis. Aussie-dollar options trading was 166 percent higher than average.
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