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Dollar Surges as Bernanke Sparks Carry Trade Plunge; Rupee Falls

June 20, 2013

June 20 (Bloomberg) -- The dollar surged against counterparts worldwide ranging from Australia’s currency to Turkey’s lira as the Federal Reserve’s signal it is getting closer to reducing monetary stimulus pushed volatility to the highest in a year and spurred losses in carry trades.

The U.S. currency strengthened versus all of its 16-most- traded peers and Deutsche Bank AG’s G10 FX Carry Basket index fell to the lowest level since October as Fed Chairman Ben S. Bernanke yesterday outlined the case for reduced monetary stimulus this year if the U.S. economy keeps improving. India leads carry losses among the 31 most-traded currencies versus the dollar this month with a 4.8 percent decline while its central bank likely intervened to protect the rupee.

"The market is in a shoot first and ask questions later kind of a mode, and you see massive dollar strength, unwind of carry trades," Eric Stein, a portfolio manager at Eaton Vance Corp. who helps oversee about $17.5 billion of fixed-income assets in Boston, said in a telephone interview. "The Fed has pulled forward volatility."

The dollar rose 0.6 percent to $1.3220 per euro at 2:14 p.m. in New York, reaching the biggest gain since May 9. The U.S. currency advanced 1.6 percent to 97.96 per yen. Japan’s currency fell 1 percent to 129.48 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, gained 0.6 percent to 81.893, reaching its strongest level since June 6. 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 JPMorgan Global FX Volatility Index increased to 11.51 percent, the highest level since June 7, 2012. The average in the past year is 8.66 percent.

Yields on benchmark Treasuries touched 2.47 percent, the highest since August 2011. Treasuries due in 10 years yielded 1.07 percentage points less than similar-maturity Australian debt yesterday, almost the narrowest spread since November 2008. U.S. bonds yielded 1.54 percentage points more than Japanese debt yesterday, the biggest gap since August 2011.

"The leveraged carry trades have been taken to the woodshed pretty aggressively over the last little while," Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. "As rates rise in the U.S. that makes funding for some of these carry trades into emerging markets and some of the high yielding G-10 markets that much more expensive to carry."

 

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