Dollar Falls a 2nd Day Versus Yen as Fed Officials Back Stimulus

The dollar weakened for a second day against the yen as Federal Reserve Bank of New York President William C. Dudley said policy makers must “forcefully” push against economic headwinds.

The U.S. currency fell versus the majority of 16 major peers as Bank of Atlanta President Dennis Lockhart, who has backed the Fed’s $85 billion in monthly bond purchases that were retained last week, said policy should focus on creating a more dynamic economy. The yen gained against most of its major peers as U.S. two-year note yields have dropped 20 basis points since reaching 0.53 percent on Sept. 6, the highest level since May 2011. The 17-member currency fell versus the dollar after European Central Bank President Mario Draghi said he’s ready to deploy another long-term refinancing operation, if needed.

“The U.S. dollar continues to trade near lows versus the euro and other major foreign-exchange counterparts,” David Rodriguez, quantitative strategist in New York at DailyFX, wrote today in a client note. “But the fact that the greenback continues to hold key lows suggests that traders are not yet willing to force larger dollar weakness.”

The dollar weakened 0.5 percent to 98.85 yen at 5 p.m. New York time, after dropping 0.1 percent on Sept. 20. The greenback lost 0.2 percent to $1.3493 per euro. The yen advanced 0.7 percent versus the common currency to 133.37.

Aussie, Rand

Australia’s dollar advanced after data showed manufacturing expanded in China, the nation’s biggest trading partner. The preliminary reading for a Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics rose to 51.2 this month from 50.1 in August. The Bloomberg survey median was for 50.9. The Aussie gained 0.4 percent to 94.31 U.S. cents.

The rand strengthened for the first time in three days after manufacturing in China, the biggest buyer of South African raw materials, rose to a six-month high in September. The currency climbed 0.5 percent to 9.8431 per dollar.

Indonesia’s rupiah fell the most in more than a week versus the dollar amid speculation local companies are boosting dollar purchases to meet month-end debt and import payments. The currency weakened 0.8 percent to 11,445 per dollar after declining 1.4 percent, the most since Sept. 12.

The Israeli shekel slipped versus the majority of its 31 most-traded peers after the Bank of Israel unexpectedly reduced its benchmark lending rate. It decreased 0.6 percent to 3.5322 per dollar after falling as much as 0.8 percent.

Fed Policy

The U.S. dollar fell after policy makers said on Sept. 18 that they want more proof of an economic recovery before curbing their bond-purchase program, known as quantitative easing, surprising analysts who predicted a $5 billion cut.

The dollar may also stay under pressure as a deadline on increasing the U.S. government’s debt ceiling approaches, according to UBS AG.

“Dudley expressed support for the Fed’s decision to keep accommodation as it is,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York, said in a telephone interview. “That sort of dovish commentary is going to keep pressure on the dollar.”

The dollar may break key levels of resistance versus the yen at 101.53, and then 103.74, the May high, according to a client note written by UBS technical strategist Richard Adcock. Beyond that, he said the focus is on the 105.75 level, which would be the highest in almost five years.

Dollar Measure

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, fell 0.2 percent to 1,011.81 after tumbling 1 percent last week.

Mexico’s peso rose 0.4 percent to 12.8036 per dollar.

Futures traders reversed their bets that the Mexican peso will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the peso compared with those on a gain -- so-called net shorts -- was 10,201 on Sept. 17, compared with net longs of 8,279 a week earlier.

The euro weakened versus most of its major peers.

“While repayment of central bank credit is certainly a sign of normalization, the resulting reduction in excess liquidity can reinforce upward pressures on term money market rates,” Draghi said in testimony to the European Parliament in Brussels. He said the ECB is ready to use tools “including another LTRO, if needed.”

Merkel Wins

Germany’s voters re-elected Chancellor Angela Merkel yesterday. Merkel’s Christian Democratic bloc took 41.5 percent of the vote, versus 25.7 percent for the Social Democrats of Peer Steinbrueck, according to results from all 299 districts. That leaves her short of a majority and party leaders are due to meet today to discuss forming a coalition.

Trading in over-the-counter foreign-exchange options totaled $14.6 billion, from $18 billion on Sept. 20, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-real exchange rate amounted to $3.1 billion, the largest share of trades at 21 percent. Options on the dollar-yen rate totaled $2.4 billion.

Dollar-real options trading was 319 percent more than the average for the past five Mondays at a similar time in the day, according to Bloomberg analysis. Dollar-yen options trading was 28 percent less than average.

The euro has risen 5 percent this year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen lost 11.4 percent, the worst performer, while the dollar rose 2.4 percent.

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