Dollar Rally Erases Fed Minutes Losses on Growth Outlook

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The dollar gained for a second day, erasing its decline since minutes of the Federal Reserve’s most recent meeting showed policy makers are concerned the U.S. economy may be at risk from a worldwide slowdown.

The U.S. currency rose against most of its 31 major peers. The yen strengthened this week against the euro as European Central Bank President Mario Draghi said there were indications the region’s economy is losing momentum, boosting demand for haven assets. Australia’s dollar fell for after a report showed home loans unexpectedly dropped, while Norway’s krone slid as inflation accelerated less than economists forecast.

“The market’s just trying to get its bearings after a volatile week,” said Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “The dollar, fresh off its record rally, and with Fed concerns on the rise about the potential impact to the economy from currency appreciation, overall the dollar could see a slower pace of appreciation. But broader term, it looks good.”

The U.S. Dollar Index rose 0.5 percent to 85.91 as of 5 p.m. New York time. The measure dropped 0.9 percent over the past five days, snapping the longest weekly streak of gains since 1971, when the Bretton Woods agreement that pegged the U.S. currency to gold collapsed.

The dollar fell 0.2 percent to 107.66 yen, boosting a weekly decline of 1.9 percent, the first since the period ended Aug. 8. The U.S. currency rose 0.5 percent to $1.2628 per euro. The yen appreciated 0.7 percent to 135.96 per euro.

Record Positions

Hedge funds and other leveraged investors raised their bets on the dollar versus eight of its major peers to 313,878 contracts in the week to Oct. 7, the highest in data going back to 2008, numbers from the Commodity Futures Trading Commission in Washington show.

Japan’s currency gained versus most of its 31 major counterparts this week, buoyed by risk-averse investors as stocks and commodity prices tumble. Standard & Poor’s 500 Index slipped 3.1 percent, its biggest weekly loss since May 2012. West Texas Intermediate crude fell the most since January.

A strong yen is probably in the country’s national interest, Eisuke Sakakibara, a former policy maker and now professor at Aoyama Gakuin University, said in an interview with Reuters today. The yen fell the most since January 2013 against the dollar last month.

Inflation Goal

Naoyuki Shinohara, a deputy managing director at the International Monetary Fund, said the Bank of Japan needs to manage expectations on a 2 percent inflation target that looks out of reach. Flexibility on achieving the target during the fiscal year starting April 2015 would be supportive for the yen because it would quell speculation that the bank will boost stimulus to meet the goal.

“There is the need to be more creative on that point,” said Shinohara, a former vice finance minister in Japan and executive director at the Asian Development Bank, in an interview in Washington.

Australia’s dollar declined after the Bureau of Statistics said home loans dropped 0.9 percent in August from the previous month. The Aussie weakened 1.1 percent to 86.86 U.S. cents, paring its gain this week to 0.1 percent.

Norway’s currency fell after an inflation report showed underlying consumer prices rose an annualized 2.4 percent last month, versus a 2.6 percent estimate in a Bloomberg survey of analysts. The currency depreciated 0.6 percent to 6.5100 per dollar and lost 0.1 percent to 8.2220 per euro.

Trading Patterns

A measure of the dollar’s momentum, known as the seven-week relative strength indicator, rose as high as 96.6 at the end of last month, well above the 70 level that most traders view as a signal the currency’s move higher is ready to exhaust itself and reverse lower. The measure was 63 today.

The currency gained the past two days as traders reassessed minutes from the latest Fed meeting. A number of Federal Open Market Committee participants said the U.S. expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated,” according to minutes of the Sept. 16-17 meeting on Oct. 8.

“The dollar strengthening trend is to continue,” said Michael Woolfolk, a global-markets strategist at Bank of New York Mellon in New York. “The reason why the market may have gotten a little bit of market indigestion over the minutes was that there really wasn’t much to focus on this week.”

Stability Risk

Philadelphia Fed President Charles Plosser said today that maintaining interest rates at too low a level for too long poses a risk to financial stability.

The yen advanced 1.7 percent in the past month, the second-best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar was the best performer, rising 2.6 percent, and the euro was little changed.

“The broader dollar uptrend is still intact,” said Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA. “Markets started having second thoughts yesterday about their reaction to the FOMC minutes so that’s probably helped.”

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