Dollar Drops for 2nd Day on Fed Rate Bets; Real Tumbles

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The dollar fell for a second day versus major peers on speculation the Federal Reserve will maintain record-low interest rates for an extended period after it cuts its bond-buying program.

The U.S. currency extended losses as data showed contracts to purchase existing homes rose less than forecast, a day before the central bank begins a two-day policy meeting. The euro rose against the U.S. currency as results of European Central Bank stress tests eased concern that balance sheets at some lenders were too weak. Brazil’s real tumbled to its lowest level in almost six years after President Dilma Rousseff narrowly won a second term. The ruble slid.

“The market was a bit ahead of itself when it comes to what the Fed’s going to do -- the Fed’s probably going to remain dovish for quite some time,” Douglas Borthwick, head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone.

The Bloomberg Dollar Spot Index, which measures the greenback against 10 major peers, dropped 0.2 percent to 1,066.41 at 5 p.m. New York time. It has dropped 0.4 percent this month after reaching 1,080.05 on Oct. 3, the highest on a closing basis since June 2010.

The U.S. currency retreated 0.3 percent to 107.82 yen, and fell 0.2 percent to $1.2698 per euro. The yen rose 0.1 percent to 136.91 against the euro, after touching 137.47 earlier, the weakest since Oct. 9.

“Euro-dollar has the capacity to end the year at $1.30,” Borthwick said.

Real Weakens

The real slumped against all of its 31 major peers and stocks approached a bear market for the second time this year after Rousseff won Brazil’s top job by the tightest margin since at least 1945, beating Senator Aecio Neves, a former governor of Minas Gerais state.

The real fell 1.9 percent to 2.5211 per dollar and touched 2.5564, the lowest level since December 2008. The Ibovespa benchmark equity index fell 2.8 percent to 50,503.66, dipping 18 percent since reaching a bull-market high on Sept. 2.

The ruble declined for a fourth day as central bank interventions failed to stem the depreciation amid concern Russia will toughen its stance over Ukraine after pro-European Union parties dominated in weekend elections.

The currency slid 1 percent to 47.4057 against the central bank’s target dollar-euro basket.

South Korea’s won led gains in Asia after the results of the balance-sheet tests on European lenders spurred demand for riskier assets. The currency gained 0.5 percent to 1,052.25 per dollar.

Ifo Report

The Stoxx Europe 600 Index of shares declined 0.6 percent, giving back some of its 2.7 percent surge last week, which was the most since December. The Ifo institute’s business climate index, based on a survey of 7,000 executives, dropped to 103.2 in October from 104.7 in September. That’s the lowest since December 2012. Economists predicted a decline to 104.5, according to the median estimate in a Bloomberg survey.

The ECB-led stress tests identified a total capital shortfall of 25 billion euros as of the end of 2013, all but 6.35 billion euros of which has now been made good by banks. None of Europe’s largest banks were found lacking. No French, German or Spanish institutions were required to raise more capital.

“Partly, the yen will be driven by outside risk factors,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. After the stress tests “the market is moving on and really focusing its attention on what lies ahead for the euro. That is the move toward more possible stimulus measures.”

Fed Bets

The dollar dropped before the Federal Open Market Committee led by Chair Janet Yellen will debate when to start raising interest rates. Futures traders have pushed back their bets on the timing of rate increases, with the odds of it going up by December 2015 at 66 percent, from 85 percent by October next year as recently as last month.

The Fed indicated in the September meeting that it planned to end its quantitative-easing programs this month. It has held its key interest rate at zero to 0.25 percent since 2008.

The pending home sales index increased 0.3 percent after dropping 1 percent in August, the National Association of Realtors said today in Washington. The median projection in a Bloomberg survey of economists called for a 1 percent gain.

A report on Oct. 30 will show U.S. gross domestic product expanded at a 3 percent annual rate in the third quarter, according to a Bloomberg News survey of analysts. That compares with growth of 4.6 percent in the second quarter and a 2.1 percent contraction in the first.

“There’s a little bit of reaction on the pending-home-sales data,” Brad Bechtel, managing director of Faros Trading LLC in Stamford, Connecticut, said in a phone interview. Today’s dollar move is a reflection of “pre-FOMC, pre-GDP -- these are going to be the two big catalysts. The market is a little quiet ahead of that.”

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