Dollar Drops Amid Speculation Fed Tapering on Hold; Real Rallies

The dollar weakened against all of its 16 most-traded counterparts as demand for higher-yielding assets rose amid speculation a reduction of monetary stimulus by the Federal Reserve is on hold.

The yen rose for the first time in four days against the dollar amid bets further policy measures may be needed to weaken the currency after Prime Minister Shinzo Abe’s coalition cemented control of parliament. Brazil’s real climbed, and Australia’s dollar rallied. Fed Chairman Ben S. Bernanke told Congress last week it was “too early” to decide to begin tapering the central bank’s bond purchases in September.

“Markets have settled down with the realization that Fed policy will remain very accommodative for a long period of time,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a telephone interview. “Emerging markets have seen some stabilization in sentiment. Emerging-market currencies, commodities are benefiting from more positive risk sentiment.”

The dollar dropped 1 percent to 99.67 yen at 5 p.m. New York time and lost as much as 1.4 percent, the biggest intraday decline since July 11. The yen rose 0.6 percent to 131.42 per euro. The euro appreciated 0.3 percent to $1.3186 and touched $1.3218, the strongest since June 21.

JPMorgan Chase & Co.’s Global FX Volatility Index, a measure of currency fluctuations, slid to 9.21 percent, the least on closing basis since May 14. It touched a one-year high of 11.96 percent June 24, and has averaged 9.33 percent in 2013.

Emerging Markets

An equally weighted basket of so-called BRICS emerging-market currencies rallied a second day. BRICS refers to Brazil, Russia, India, China and South Africa.

Copper for September delivery rose to settle at $3.185 a pound after reaching $3.215 earlier, the highest level in almost six weeks. Gold advanced 3.1 percent to $1,335.82 an ounce.

Brazil’s real climbed for the first time in three days as comments by central-bank President Alexandre Tombini fueled speculation policy makers may step up the pace of borrowing-cost increases. The currency strengthened 0.6 percent to 2.2331 to the greenback.

Australia’s dollar strengthened after the People’s Bank of China said July 19 it was ending a floor on borrowing costs previously set at 30 percent below the benchmark rate. China is Australia’s biggest trading partner. The Aussie gained 0.8 percent to 92.49 U.S. cents.

Bernanke Comments

Bernanke said last week in two days of congressional testimony that the Fed’s bond purchases “are by no means on a preset course” and may be reduced more quickly or expanded as economic conditions warrant.

The dollar climbed last month after the Fed chief said the purchases may slow this year and stop in mid-2014 if economic growth meets policy makers’ projections.

The Fed buys $85 billion of Treasuries and mortgage debt each month as part of its quantitative-easing stimulus to cap borrowing costs, a program that tends to debase the dollar.

The yen’s strength gives scope to sell the currency because reforms will ultimately put it under pressure, Morgan Stanley strategists including Hans Redeker wrote in client note.

Abe’s Liberal Democratic Party and its New Komeito ally now have 135 of the 242 seats in the upper house. The LDP has controlled the lower house since elections in December.

Deflation Focus

The prime minister said today he’ll focus on stemming deflation. Decisions loom on issues including whether to cut corporate taxes, reduce labor regulations, make it easier to consolidate agricultural land and allow greater access to overseas goods and services.

“It boils down to your faith in Abenomics and whether or not you think he’s going to be able to push his agenda further, and more importantly whether that’s really good for the yen,” Gerry Celaya, a senior currency strategist at Aberdeen, Scotland-based Redtower Asset Management, said in a phone interview. “We’ve priced in a lot, and we need something to deliver here. In our view, it’s going to have to come from the Bank of Japan.”

BOJ policy makers at a meeting July 10 stuck with a pledge to expand the monetary base by 60 trillion yen ($605 billion) to 70 trillion yen per year in their plan to end deflation.

The yen has weakened 10 percent this year, the biggest decline among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar appreciated 4.7 percent and the euro advanced 4.6 percent.

Euro Advances

The euro rose versus rose versus the dollar amid optimism Portugal’s government will stay in office until 2015, giving the nation time to complete its European-Union-led aid deal. President Anibal Cavaco Silva said the current government will stay in office and he doesn’t want to call early elections.

Trading in over-the-counter foreign-exchange options totaled $23 billion, compared with $29 billion on July 19, 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 amounted to $7.2 billion, the largest share of trades at 31 percent. Aussie-dollar options totaled $3.4 billion, or 15 percent, the second-largest share.

Dollar-yen options trading was 4 percent less than the average for the past five Mondays at a similar time in the day, according to Bloomberg analysis. Aussie-dollar options trading was 45 percent more than average.

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