Dollar Rallies Most Since 2009 as Fed Levels Financial Markets

The dollar surged the most versus the yen since December 2009 as the Federal Reserve signaled a shift in monetary policy that sparked deepening global losses in everything from gold to emerging-market assets.

The U.S. currency strengthened versus all 16 of its most-traded counterparts after Fed Chairman Ben S. Bernanke said June 19 that policy makers, pending improved economic growth, may begin trimming unprecedented bond-buying this year and end it next year. An equally weighted basket of seven so-called commodity currencies from Chile’s peso to Norway’s krone dropped 4 percent against the greenback this week, the most since September 2011. The Commerce Department may confirm June 26 that the U.S. economy grew at a 2.4 percent annual rate in the first quarter, a Bloomberg survey shows.

“We’ve been pretty positive the dollar for quite a long time and that’s coming to fruition,” Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life Investments Ltd., which oversees about $273 billion, said June 20 in a phone interview. “If you have an economic recovery and funding costs are potentially a bit higher, we think the U.S. dollar is not the most appropriate funding vehicle now.”

The greenback rose 3.8 percent to 97.90 yen this week in New York, the most since the five days ended Dec. 4, 2009. The U.S. currency added 1.7 percent to $1.3122 per euro, touching the strongest level since June 6. The yen lost 2.3 percent to 128.45 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, increased 2.2 percent to 82.410. It rose 1 percent on June 19 when the Federal Open Market Committee 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.

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 Norwegian krone was the biggest loser versus the dollar among major currencies compiled by Bloomberg this week, down 5.6 percent, followed by Mexico’s peso, off 4.5 percent. The Taiwan dollar had the smallest loss, minus 0.9 percent, followed by Switzerland’s franc, which was down 1.4 percent

The krone had the biggest weekly decline since October 2008 and weakened beyond 8 per euro for the first time since December 2010 after the central bank predicted June 20 that its benchmark interest rate may be lower in the year ahead.

Nordic Currencies

Norway’s currency fell 4.2 percent to 7.9500 per euro. The Swedish krona slipped 3.7 percent to 6.6712 to the greenback.

The dollar has strengthened 3.1 percent in the past week, the best performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. New Zealand’s dollar fell 1.2 percent while Australia’s dollar weakened 1.1 percent.

“Talk of tapering meant the dollar was entering a position of strength,” Matt Eagan, co-manager of the Loomis Sayles Bond Fund and the Strategic Alpha Fund in Boston, said June 20 in a telephone interview, referring to the Fed’s signaling that it may reduce asset purchases. “When you have a move like that in rates, it really upsets the carry trade in particular. So we saw a lot of investors taking that off.”

Yields on benchmark Treasuries rose the most this week since the Iraqi war and touched 2.55 percent, the highest since August 2011. Deutsche Bank AG’s G10 FX Carry Basket index fell to 112.27 on June 20, the lowest level since September.

Fed Activity

The U.S. currency is gaining even as the Fed hasn’t yet slowed the addition of securities to its $3.47 trillion balance sheet. The central bank has been buying government debt as it seeks to stimulate the economy by driving down borrowing costs and boosting assets from stocks to homes.

Those monetary-policy measures have driven investors into higher-yielding assets such as emerging-market debt and precious metals as a hedge against inflation, and now those trades are beginning to unwind, said Alan Ruskin, global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG.

“The world was working in one way, very clearly, in terms of very easy U.S. money and the BRIC and emerging market growth perceived as a strong structural outperformance,” Ruskin said in a phone interview. “That world view has been rocked on both sides. The Fed is obviously only going to tighten very, very slowly, but none the less you can see two years out they’re very likely to be tightening.”

Former Goldman Sachs Asset Management Chairman Jim O’Neill coined the term BRIC in 2001 to describe Brazil, Russia, India and China -- the four emerging powers he estimated would equal the U.S. in joint economic output by 2020. Those nations invited South Africa to join their ranks in December 2010.

BRICs Growth

The BRIC economies may expand 5.9 percent this year, according to the median forecast of economists surveyed by Bloomberg. That compares with 5.6 percent in 2012 and 7 percent the previous year. A separate survey shows China’s gross domestic product increasing 7.7 percent this year after expanding 7.8 percent in 2012.

“China was obviously seen as a big source of commodity demand and that’s on the wane,” Ruskin said. “When you add the pieces together, the end of QE investment component, the stronger dollar component and the China story, a lot of people are putting these pieces together and saying this is the turn of the commodity super cycle.”

An equally weighted basket of currencies from South Africa, Chile, Australia, Brazil, New Zealand, Canada and Norway versus the dollar fell to the lowest level since November 2011, according to data compiled by Bloomberg. Commodity currencies are those of countries that tend to benefit from raw materials exports.

Gold Slump

Gold this week slumped below $1,300 an ounce for the first time since September 2010. The JPMorgan EMBI Global Index of developing-nation dollar bonds has slipped 4.3 percent this week, the worst returns since October 2008.

“The key takeaway this week is the fact that we’ve got bond yields” above 2.5 percent, Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., said in an interview on Bloomberg Television’s “Surveillance” with Sara Eisen. “It looks like they’re essentially here to stay and that’s putting the recovery of those commodity and emerging currencies very much at risk.”

Hedge funds and other large speculators shifted their bets to an advance for the euro against the dollar for the first time since February, figures from the Washington-based Commodity Futures Trading Commission show. They also trimmed wagers the yen will decline against the greenback.

The difference in the number of wagers by on an advance in the euro compared with those on a drop -- so-called net longs -- was 20,030 on June 18, compared with net shorts of 7,533 a week earlier. Futures traders were last net long the euro on Feb. 22.

Net yen shorts totaled 61,890 on June 18, compared with net shorts of 72,906 a week earlier.

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