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Dollar Declines From One-Week High on Fed-Tapering Speculation

August 15, 2013

Aug. 15 (Bloomberg) -- The dollar declined from a one-week high as speculation the Federal Reserve will begin reducing its stimulus measures as soon as next month weighed on demand for assets denominated in the U.S. currency.

The Bloomberg U.S. Dollar Index rose earlier as jobless claims unexpectedly dropped last week to the lowest level in almost six years, Labor Department data showed. The U.S. currency reversed gains against the euro and yen as stocks fell and Treasury yields touched two-year highs. The pound climbed to an eight-week high against the dollar after U.K. retail sales rose more than forecast. The Fed has been buying $85 billion of bonds a month to support the economy and cap borrowing costs.

"The selling of the dollar is consistent with the weakness in the equity market and the bounce off the yield highs in bonds," Richard Gilhooly, an interest-rate strategist at TD Securities Inc. in New York. "The better data today is misleading."

The Bloomberg U.S. Dollar Index fell 0.4 percent to 1,020.87 at 2:17 p.m. New York time after earlier rising 0.4 percent to 1,028.72, the strongest since Aug. 5.

The dollar dropped 0.6 percent to $1.3340 per euro and fell 0.8 percent to 97.34 yen. Japan’s currency added 0.2 percent to 129.85 per euro.

Benchmark U.S. 10-year note yields were at 2.74 percent after rising to 2.82 percent, highest since August 2011. The Standard & Poor’s 500 Index of stocks plunged 1.6 percent.

 

Rupiah, Pound

 

The Indonesian rupiah fell to its weakest level in more than four years after the country’s central bank kept its reference rate on hold and a report showed foreign-exchange reserves fell to the lowest level since 2010. The currency depreciated 0.6 percent to 10,350 per dollar after earlier falling to 10,353, its lowest since June 2009.

Britain’s pound has strengthened 3.6 percent in the past month versus the dollar as reports showed purchasing managers indexes of manufacturing, services and construction all improved in July while house prices increased. The economy expanded by 0.6 percent in the second quarter.

The U.K. currency gained 1 percent to $1.5649 after advancing to $1.5651, the highest since June 19. Sterling appreciated 0.3 percent to 85.26 pence per euro after reaching 85.05 pence, the strongest since July 3.

New Zealand’s dollar strengthened against most of its 16 major peers as data showed manufacturing expanded at the fastest pace in nine years, job advertisements increased and a gauge of consumer confidence rose. The kiwi rose 0.6 percent to 80.73 U.S. cents.

 

Industrial Output

 

The dollar gained earlier as the number of applications for unemployment insurance payments declined by 15,000 to 320,000 in the week ended Aug. 10, the fewest since October 2007, from a revised 335,000, a Labor Department report showed today in Washington. The median forecast of 44 economists surveyed by Bloomberg called for applications totaling 335,000.

The currency erased the advance after industrial production in the U.S. was unchanged in July as a slowdown at factories overshadowed an increase in mining. The reading for output at factories, mines and utilities followed a 0.2 percent gain the prior month that was smaller than previously reported, a report from the Federal Reserve showed. The median forecast in a Bloomberg survey called for a 0.3 percent rise in July.

"When the claims data came out, it positively impacted the dollar, but since then we had other data that suggests some weakness in the U.S. economy," said Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York. "The manufacturing side of the economy is still struggling."

 

Fed Outlook

 

Fed Chairman Ben S. Bernanke next month will probably reduce the central bank’s monthly bond purchases, according to 65 percent of economists surveyed by Bloomberg. The Federal Open Market Committee’s first step may be small, with monthly purchases tapered by $10 billion to a $75 billion pace, according to the median estimate in a survey of 48 economists conducted Aug. 9-13.

"If it turns out it’s just a token amount -- no more than $10 billion -- and if he spells out a scenario whereby there in no rush to keep slowing purchases, then the dollar could actually start falling through the tapering," said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. "U.S. yields have come a little bit off their highs, so that explains a little bit of the reversal in the dollar."

 

Options Trading

 

The dollar has fallen 2.3 percent over the past month, the most according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro is little changed and the yen added 0.6 percent.

Trading in over-the-counter foreign-exchange options totaled $24 billion, compared with $26 billion yesterday, 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 billion, the largest share of trades at 29 percent. Options on the dollar-Chinese yuan rate totaled $2.2 billion, or 11 percent.

Dollar-yen options trading was 21 percent more than the average for the past five Thursdays at a similar time in the day. Dollar-yuan options trading was 193 percent more than average.

 

--With assistance from Cordell Eddings in New York. Editors: Kenneth Pringle, Dave Liedtka

 

To contact the reporters on this story: Jeff Marshall in New York at jmarshall75@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net

 

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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