Yen Rises With Dollar as Fed Taper Fuels Emerging Markets Rout

The yen and dollar gained against most emerging-market currencies as the Federal Reserve continued to trim monthly bond buying that has propped up global asset prices.

New Zealand’s dollar extended a decline versus the greenback as the central bank held interest rates steady after Governor Graeme Wheeler said in December he expected borrowing costs to rise in the first half of 2014. Developing-economy currencies fell earlier as South Africa’s central bank joined Turkey in raising its benchmark interest-rate in moves that failed to reassure investors. Russia’s ruble extended its slump to 13 days and Hungary’s forint weakened.

“From the point of view of emerging markets, the Fed has just said ‘hasta la vista, baby,’” Steven Englander, global head of Group of 10 foreign-exchange strategy at Citigroup Inc., wrote in an e-mail. “There is modest disappointment in” riskier currencies.

The yen snapped two days of losses to strengthen 0.6 percent to 102.29 per dollar at 5 p.m. in New York, having fallen as much as 0.5 percent. It gained 0.7 percent to 139.75 per euro, after declining 0.4 percent. The dollar added 0.1 percent to $1.3663 against the 18-nation shared currency. New Zealand’s dollar fell 0.5 percent to 82.14 U.S. cents.

The Bloomberg Dollar Spot Index, which monitors the greenback against 10 major counterparts, was little changed at 1,027.05 after touching 1,025.05, the lowest level since Jan. 14.

‘Contagion Spreading’

The Fed will trim its monthly bond buying by $10 billion to $65 billion, sticking to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy. It has undertaken three rounds of bond buying since 2008 under the quantitative-easing stimulus strategy, swelling its balance sheet to a record $4 trillion.

The central bank had been forecast to continue reducing purchases by $10 billion at this meeting and each one following to end the stimulus program this year, according to analysts in a Jan. 10 Bloomberg News survey.

“It really signals the Fed doesn’t see any contagion from emerging markets to developed markets,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a phone interview. “Developed markets are at a much more stable footing now. If the economic and political problems in EM persists there’ll be an increasing risk of contagion spreading to developed markets.”

Benchmark Rate

Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since 2008. The central bank left unchanged its statement that it will probably hold its benchmark rate near zero “well past the time” that unemployment below 6.5 percent, “especially if projected inflation” continues to run below the Fed’s 2 percent goal.

“This is a meeting that was by and large as expected,” Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York, said in a telephone interview. “This does not get us out of the woods as far as the EM crisis is concerned. The Fed’s mandate is to manage the U.S. economy, they can’t worry about everyone else.”

The yen gained as Turkish central bank Governor Erdem Basci fights to arrest a run on the lira after a corruption scandal that broke last month ensnared several cabinet members. The political fallout coincided with an outflow of money from emerging economies including Brazil as the U.S. reduces monetary stimulus.

The lira swung between gains and losses, rising as much as 4 percent and dropping as much as 3 percent.

Rand Tumbles

The exodus prompted the South Africa Reserve Bank to unexpectedly increase its benchmark interest rate. The Monetary Policy Committee lifted the repurchase rate to 5.5 percent from 5 percent, Governor Gill Marcus told reporters in Pretoria today. All 25 economists surveyed by Bloomberg last week said the rate would stay unchanged as the central bank focuses on supporting an economy buffeted by slower global demand and mining strikes.

The rand fell as much as 3.1 percent, the most since April.

“It has ironically destabilized conditions,” said Marc Chandler, a currency strategist in New York at Brown Brothers Harriman & Co. Policy makers “undermined the immediate impact of the move by indicating it was not about stabilizing the rand.”

Ruble, Forint

Russia’s central bank may have spent about $2.8 billion to slow the ruble’s decline today, according to Dmitry Dorofeev, a money manager at BCS Financial Group in Moscow. That would be the biggest intervention since September 2011, according to central bank data.

The ruble dropped 0.7 percent against the dollar to 35.0870 and hasn’t gained since Jan. 10, one of only three days it appreciated this year. It weakened to a record low 40.9672 versus Bank Rossii’s target dollar-euro basket on a closing basis.

The forint slid the most in more than 18 months as central bank President Gyorgy Matolcsy signaled further interest rate cuts. The currency of Hungary, the most indebted nation in the east of the European Union, depreciated 1.8 percent to 309.15 per euro after falling 2.1 percent, the most since June 2012.

“The Fed is pulling away the punchbowl and obviously that’s ripping the capital markets, repatriating capital out of countries where they are laboring under relatively high inflation,” Robbert Van Batenburg, director of market strategy at Newedge Group in New York, said by phone.

The yen has advanced 4.3 percent in 2014, the biggest gain in Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar gained 1 percent and the euro added 0.3 percent. The Canadian dollar is the worst performer, falling 4.5 percent.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE