Dollar Surges as Bernanke Sparks Carry Trade Plunge; Rupee Falls

The dollar surged against counterparts worldwide ranging from Australia’s currency to Turkey’s lira as the Federal Reserve’s signal it is getting closer to reducing monetary stimulus pushed volatility to the highest in a year and spurred losses in carry trades.

The U.S. currency strengthened versus a majority of its 16-most-traded peers and Deutsche Bank AG’s G10 FX Carry Basket index fell to the lowest level since October as Fed Chairman Ben S. Bernanke yesterday outlined the case for reduced monetary stimulus this year if the U.S. economy keeps improving. India is among leaders for carry losses among the 31 most-traded currencies versus the dollar this month with a 4.8 percent decline while its central bank likely intervened to protect the rupee.

“The market is in a shoot first and ask questions later kind of a mode, and you see massive dollar strength, unwind of carry trades,” Eric Stein, a portfolio manager at Eaton Vance Corp. who helps oversee about $17.5 billion of fixed-income assets in Boston, said in a telephone interview. “The Fed has pulled forward volatility.”

The dollar rose 0.6 percent to $1.3220 per euro at 5 p.m. in New York, reaching the biggest gain since May 9. The U.S. currency advanced 0.9 percent to 97.28 per yen. Japan’s currency fell 0.3 percent to 128.61 per euro.

Dollar Measure

The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six U.S. trade partners, gained 0.6 percent to 81.779, reaching its strongest level since June 6. The gauge may climb to 85.7 by the end of the year, according to the median forecast of economists and strategists surveyed by Bloomberg.

The JPMorgan Global FX Volatility Index increased to 11.51 percent, the highest level since June 7, 2012. The average in the past year is 8.66 percent.

Yields on benchmark Treasuries touched 2.47 percent, the highest since August 2011. Treasuries due in 10 years yielded 1.07 percentage points less than similar-maturity Australian debt yesterday, almost the narrowest spread since November 2008. U.S. bonds yielded 1.54 percentage points more than Japanese debt yesterday, the biggest gap since August 2011.

“The leveraged carry trades have been taken to the woodshed pretty aggressively over the last little while,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “As rates rise in the U.S. that makes funding for some of these carry trades into emerging markets and some of the high yielding G-10 markets that much more expensive to carry.”

Carry Out

Deutsche Bank’s G10 FX Carry Basket index gained 6.8 percent in 2012 after declining the previous two years as weak economic data in the U.S., Japan and the euro region led to speculation that central banks would keep rates low and inject money to boost growth. With those conditions waning, volatility has increased, which is negative for the carry trade because it depends on predictable interest rates across jurisdictions.

India’s rupee dropped 1.5 percent to 59.5750 per dollar after depreciating to a record 59.98. South Korea’s won declined to as low as 1,146.55 per dollar, the weakest since July 26, before closing 1.3 percent lower at 1,145.63. The Turkish lira dropped to an all-time low versus the dollar, weakening as much as 1.9 percent to 1.9373.

Chile’s peso weakened 2.9 percent to 514.08 against the greenback and Poland’s zloty fell 1.9 percent to 3.2872.

Fed Shift

“QE3 is now likely to end in the middle of next year so we’ve had an initial rise in the dollar,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London, referring to quantitative easing, or QE. “People are reading this as the end the cheap money that’s gone into emerging markets from the U.S. and Europe. If today’s U.S. data is reasonable, the dollar will continue to rally against currencies like the Aussie in particular.”

More Americans than forecast filed applications for unemployment benefits last week, showing progress on reducing joblessness remains uneven amid slower growth this quarter.

Australia’s dollar dropped for a fifth day versus the greenback amid the prospect of reduced Fed stimulus and after HSBC Holdings Plc and Markit Economics said the preliminary reading of their Purchasing Managers’ Index for China’s manufacturing was at 48.3 in June, below the 49.1 estimated by economists in a Bloomberg survey.

Aussie Forces

“The link between the China growth story and the Aussie dollar remains crucial,” said Michael Judge, a dealer at OZForex Pty Ltd. in Sydney. “We all know the only way interest rates are heading in this country at the moment is south, and obviously weakening China growth doesn’t help that prognosis.”

UBS AG strategists said in a report they lowered their forecast for the Aussie to 90 U.S. cents in one to three months, from 95.

The Aussie slid 1.1 percent to 91.97 U.S. cents after dropping to the weakest since Sept. 8, 2010. The New Zealand dollar fell 1.8 percent to 77.57 cents after reaching the lowest since June 12, 2012.

The Federal Open Market Committee yesterday left the monthly pace of bond purchases at $85 billion, saying “downside risks to the outlook for the economy and the labor market” have diminished. Policy makers raised their growth forecasts for next year to a range of 3 percent to 3.5 percent and reduced their outlook for unemployment to as low as 6.5 percent.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Bernanke said in a press conference in Washington. If later reports meet the Fed’s expectations, “we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

Option Activity

Trading in over-the-counter foreign-exchange options totaled $53 billion, compared with $30.6 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 dollar-yen exchange rate was $11.2 billion, the largest share of trades at 21 percent. Dollar-yuan options were the second most actively traded, at $7.5 billion, or 14 percent.

Dollar-yen options trading was 1.1 percent less than the average for the past five Thursdays at a similar time in the day. U.S. dollar-yuan options trading was 90 percent more than average.

Norway’s currency declined the most since 2011 against the dollar. The central bank kept its benchmark rate at 1.5 percent at its meeting today, as forecast by 21 of the 22 economists surveyed by Bloomberg. The central bank predicted the key rate would be 1.38 percent in the fourth quarter of this year, versus an earlier forecast of 1.45 percent.

The krone slumped 3.3 percent to 7.9296 per euro, reaching the biggest one-day drop since December 2008. It slid to the weakest since May 2011.

“It’s partially the QE trade and risk getting hit across the board,” said Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, via e-mail. “The krone had been a favorite long for many months and the position is still unwinding.”