Dollar Posts Biggest Drop in Two Months on Fed and Yuan Rally

  • Greenback falls below 116 yen for first time since Dec. 14
  • ‘Over-extended long dollar’ wagers add to selling: Macquarie

What's Driving the Dollar Lower?

The greenback fell by the most since Donald Trump won the U.S. presidential election as the Federal Reserve’s meeting minutes showed uncertainty over how his policies would impact the pace of interest-rate increases, while a yuan rally exacerbated the dollar selling.

Investors trimmed long-dollar positions amid signs the trade has gotten increasingly crowded, sending the greenback falling below 116 yen for the first time since Dec. 14. The offshore yuan’s record two-day jump versus the dollar as liquidity tightened in Hong Kong also spurred investors to sell the greenback against other Asian currencies, according to Masakatsu Fukaya, a Tokyo-based emerging-markets trader at Mizuho Bank Ltd.

Minutes from the Federal Reserve’s December meeting published Wednesday showed officials were grappling with uncertainties about Trump’s policies and the possible impact on growth, spurring selling by macro and leveraged funds in Asia, traders said. Hedge funds and other large speculators had boosted their bearish bets on the yen last week to the most since August 2015, according to the Commodity Futures Trading Commission in Washington.

“Multiple references to dollar strength in the FOMC minutes, another plunge in the U.S. currency versus the offshore yuan and over-extended long dollar positioning more generally, have all contributed to today’s dollar selloff,” said Gareth Berry, a foreign-exchange and rates strategist at Macquarie Bank Ltd. in Singapore.

The DXY dollar gauge dropped as much as 1 percent, the most since Nov. 9, after the Fed minutes showed that officials “emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those polices might affect aggregate demand and supply.” Attention is shifting to the U.S. jobs report Friday which will probably show employers boosted payrolls by 180,000 people in December, and the unemployment rate at 4.7 percent.

The dollar had climbed as much as 1.4 percent in the first two trading days of the new year to reach 118.60 yen. This followed a more than 15 percent surge versus the yen in the fourth quarter as investors bet that President-elect Trump’s promise of fiscal stimulus will boost growth and spur the Fed to speed up rate increases.

  • USD/JPY drops 1.1% to 115.94 after touching session low of 115.58
  • EUR/USD climbs 0.5% to 1.0546 vs session high of 1.0575
  • Dollar breaks 21-DMA for JPY, AUD and NZD
  • USD/CNH sinks as much 1.2% to 6.7853, following on a 1.3% decline Wednesday; China said to consider options to support the yuan, including ordering state-owned enterprises to sell dollars, according to Bloomberg report yesterday. CNH overnight deposit rate surges to a one-year high of 80% Thursday, squeezing yuan bears
  • Yield on 10-year Treasuries drops 3bps to 2.41%
  • While the FOMC debate on the potential impact from a Trump fiscal stimulus suggests the risk is a tighter Fed policy in 2017, the market appears to have focused on the “considerable uncertainty” headline, says Rodrigo Catril, a currency strategist at National Australia Bank in Sydney; Trump promised higher spending on infrastructure, tax cuts and regulatory reform during his campaign, though has offered few new details of his policy goals since winning the Nov. 8 election

— With assistance by Daisuke Sakai, Kevin Buckland, and Garfield Clinton Reynolds

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