Dollar Rises Most Since April on Reduced Risk Demand Before Fed
Oct. 31 (Bloomberg) -- The dollar gained the most against the euro in six months on concern the global recovery may stall as economic stimulus winds down, reducing demand for higher- yielding assets funded by the greenback.
The pound touched the strongest level against the euro this week since September after gains in consumer confidence and mortgage approvals added to signs an economic recovery is taking hold in the U.K. The advance in the dollar before next’s week Federal Reserve announcement pared a fourth consecutive monthly loss, part of the longest losing streak since 2004.
“There’s this increasing recognition that much of the recovery we’ve seen so far was due to the temporary boost from various government programs,” said Michael Hart, a currency strategist at Citigroup Global Markets in London. “The optimism is kind of guarded at this point.”
The dollar advanced 2 percent to $1.4719 per euro yesterday, from $1.5008 on Oct. 23. It was the biggest gain since a 2.3 percent rise in the five days ended April 10. The dollar rallied from a 14-month low of $1.5063 on Oct. 26.
New Zealand’s dollar was the biggest loser against the greenback this week as the Reserve Bank signaled the target rate will stay at a record low of 2.5 percent until the second half of 2010. The kiwi tumbled 4.8 percent to 71.81 U.S. cents, from 75.45 a week earlier, the largest five-day drop since January.
The greenback gained 4.5 percent to 7.815 South African rand and 2.5 percent to 1.7612 Brazilian reais on speculation investors reduced carry trades, in which they sell the currency of a nation with low borrowing costs and buy assets where returns are higher.
Borrowing Costs
The Fed’s target lending rate of zero to 0.25 percent in the U.S. makes the dollar a favored target for investors seeking to fund such trades. The benchmark rates are 7 percent in South Africa, 8.75 percent in Brazil.
The euro decreased 4.2 percent to 132.61 yen, from 138.15, in the biggest drop since May. The dollar fell 2.1 percent to 90.09 yen, from 89.64. It touched a level lower than 90 yesterday for the first time since Oct. 15.
The Bank of Japan decided this week to end purchases of commercial paper and corporate bonds from lenders as scheduled, while extending unlimited collateral-backed lending through March 31. Policy makers kept the benchmark interest rate unchanged at 0.1 percent.
European Central Bank council member Axel Weber said that policy makers may scale back the bank’s “very long-term” loans to banks. The ECB will leave benchmark lending rates at a record low of 1 percent at its meeting on Nov. 5, according to all 34 economists in a Bloomberg survey.
Norwegian Rate
Norway’s central bank lifted its target lending rate by a quarter-percentage point to 1.5 percent this week, becoming the first in Europe to increase borrowing costs this year.
“Central banks are slowly withdrawing emergency stimulus,” Toronto-based strategists Shaun Osborne and Jacqui Douglas at TD Securities Inc. wrote in a research note to clients yesterday. That “perhaps accounts for the modest risk- averse undertone.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, gained 1.2 percent to 76.39. It was the biggest increase since June.
Investors remained skeptical that the Federal Reserve will increase borrowing costs early next year. Fed funds futures indicated a 29 percent chance that the central bank will lift its target lending rate from a range of zero to 0.25 percent at its March meeting, compared with a 41 percent chance last week.
Fed’s Statement
The Fed completed its $300 billion Treasury purchase program, ending the seven-month buying spree that helped stabilize the housing market and capped increases in borrowing costs. It will release its monetary policy statement on Nov. 4.
Sterling rallied 2.8 percent to 89.44 pence per euro as reports showed U.K. mortgage approvals climbed in September to the highest level in 18 months and consumer confidence rose. The pound touched 89.12 on Oct. 29, the strongest level since Sept. 17. Britain’s currency gained 0.9 percent to $1.6452.
The Bank of England will probably decide next week to increase its bond-purchase program as the U.K. lags behind other industrialized countries in shaking off its longest recession on record.
Policy makers may expand the plan to 225 billion pounds ($372 billion) on Nov. 5 after this week reaching the current 175 billion pound limit for buying bonds with newly created money, the median estimate of 48 economists in a Bloomberg News survey showed.
Bank of England
The central bank will leave the benchmark rate at a record low of 0.5 percent, according to all 60 economists in a separate Bloomberg survey.
Employers in the U.S. cut fewer jobs this month than in September while the unemployment rate rose to 9.9 percent in October, according to the median forecast in a survey of economists. The Labor Department’s report is due Nov. 6.
The U.S. currency slid 0.5 percent versus the euro in October in its fourth monthly decline, the longest losing streak since December 2004, as investors piled onto carry trades. The yen weakened 0.4 percent this month versus the dollar. The yen slid 1 percent versus the euro in October.
“Everyone is thinking about the exit strategy,” said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. “Once they stop these stimulus measures, we are not going to see excessive money awash in the market. Carry trade may be arrested in the near future.”
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