Dollar Strengthens on Fed Speculation, Global Recovery Concern
"Currency" "International Economics"08/10/2010
By Catarina Saraiva and Bo Nielsen
Bloomberg Financial News
Aug 10, 2010
The dollar and yen rose against their major counterparts before a Federal Reserve statement that will signal whether the world’s biggest economy needs additional stimulus measures.
The yen climbed after the Bank of Japan kept its interest rate and policy unchanged. Higher-yielding currencies, including the New Zealand dollar and South African rand, fell after China said the pace of property-price gains and import growth slowed.
“Now that the Bank of Japan didn’t take any further easing measures last night, they’re pricing out quantitative easing from the Fed meeting this afternoon,” said Amelia Bourdeau, a currency strategist in Stamford, Connecticut, at UBS AG. “The expectation of the Fed introducing easing measures today kind of got out of hand.”
The dollar strengthened 1 percent to $1.3088 per euro at 11:56 a.m. in London. It depreciated to $1.3334 on Aug. 6, the weakest level since May 3. The yen was little changed at 85.91 per dollar and gained 1.1 percent to 112.40 per euro.
Speculation that the Fed may add stimulus mounted after data last week showed U.S. payrolls shed 131,000 jobs in July, double economists’ forecast. The Federal Open Market Committee will issue a policy statement at about 2:15 p.m. in Washington.
‘Unusually Uncertain’
Fed Chairman Ben S. Bernanke said July 21 the central bank wasn’t ready to take any action in the “near term.” At the same time, his assessment that the “economic outlook remains unusually uncertain,” along with recent weakness in data on housing and manufacturing, fueled speculation by some economists the Fed will take steps as soon as today.
“There may have been an overreaction last week after we saw the weaker-than-expected U.S. payrolls,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network. “It seems that the market has reassessed that train of thought.”
The U.S. may have to sustain “a continued trend” of data such as the payrolls report “to justify more action” from the central bank, Manimbo said
Japan’s central bank kept the benchmark overnight rate unchanged at 0.1 percent today and maintained its credit programs for lenders by a unanimous vote.
Trade Minister Masayuki Naoshima said last week the yen poses a risk to the nation’s economic outlook, and Toshiyuki Shiga, chief operating officer at Nissan Motor Co., Japan’s third-biggest automaker, said he was “very concerned” about the currency’s strength. Bank of Japan Governor Masaaki Shirakawa, speaking to reporters in Tokyo today, said the stronger yen is a downside risk for corporate sentiment.
‘Disappointment’ at BOJ
“People had expected the BOJ to comment further about the currency, a lack of which seems to be causing disappointment” among those who had sold the yen, said Masao Okayama, a researcher at Norinchukin Research Institute Co. in Tokyo. “If the Fed takes easing measures, the yen will appreciate more.”
The dollar may extend its 3 percent slump versus the yen over the past month should U.S. policy makers hint today at renewing the Fed’s bond-buying program to support the economy, according to Standard Bank Plc’s Steven Barrow.
The decline since early July “could be peanuts compared to what could happen,” Barrow, head of research for Group of 10 countries at Standard Bank in London, wrote in an investor note today. He compared the greenback’s current fall to its decline in 2002, which grew more pronounced after the Fed moved toward a second round of interest-rate cuts.
‘Tweak’ by Fed
While the Fed is unlikely to announce an “aggressive ease” today, there could be a “tweak” such as a pledge to reinvest proceeds from maturing mortgage bonds and buy more debt, Barrow wrote. The Fed bought $300 billion of Treasuries between March and October 2009 to bring down borrowing costs.
Higher-yielding currencies fell after China said exports rose 38.1 percent from a year earlier, compared with a 43.9 percent gain in June. Imports increased 22.7 percent, compared with June’s 34.1 percent growth. Property prices in 70 major Chinese cities climbed 10.3 percent from a year earlier in July, the slowest pace for six months, a separate report today showed.
Stocks decline, with the Standard & Poor’s 500 Index falling 0.9 percent.
Australia’s dollar declined after National Australia Bank Ltd. said its index of business confidence halved from June to 2 points in July. The currency fell 0.9 percent to 90.84 U.S. cents and depreciated 0.9 percent to 78.04 yen.
Sterling was weaker against most of its most-traded peers after a U.K. housing-market gauge showed the first decline in prices in a year in July, while a separate survey said stores posted slower sales growth last month. The Bank of England is due to publish its quarterly inflation report tomorrow.
The pound dropped 0.9 percent to $1.5756 while rising 0.2 percent to 83.06 pence per euro.