Dollar Weakens on Speculation Fed to Maintain Stimulus Measures

By Matthew Brown and Ron Harui
Nov. 23 (Bloomberg) -- The dollar fell the most in two weeks against the euro on speculation the Federal Reserve will keep its stimulus measures in place and ensure interest rates remain at virtually zero.
The U.S. currency slid against all of its 16 major counterparts as St. Louis Fed President James Bullard said in New York yesterday that he supported extending the central bank’s purchases of mortgage-backed securities beyond the first quarter of next year. The yen weakened against currencies led by the South African rand as commodities and stocks advanced, spurring demand for higher-yielding assets.
"The central bank language at the moment is still pretty dovish, and that’s making riskier assets more attractive than the dollar into the end of the year," said Mark O’Sullivan, director of dealing in London at Currencies Direct Ltd.
The dollar weakened 0.7 percent to $1.4970 per euro at 7:29 a.m. in New York, from $1.4862 last week, after earlier losing
0.9 percent, the biggest intraday decline since Nov. 9. The yen depreciated 0.7 percent to 132.99 versus the euro, from 132.09, and was little changed at 88.84 per dollar.
South Africa’s rand was the biggest winner versus the yen among the major currencies tracked by Bloomberg, strengthening
1.7 percent to 11.87 yen as the gain in commodities and stocks encouraged carry trades, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates.
Benchmark rates of zero to 0.25 percent in the U.S. and 0.1 percent in Japan make their currencies popular for funding such transactions.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S.
trading partners, decreased 0.7 percent to 75.095. It slid to
74.679 on Nov. 16, the lowest level since August 2008.
The Fed repeated at the end of its two-day meeting on Nov.
4 that it will complete the planned $1.25 trillion in purchases of mortgage securities by March and said it will buy $175 billion of agency debt, down from a previous maximum of $200 billion. The central bank reiterated that borrowing costs will stay low for an "extended period."
In a speech yesterday, Bullard said "unemployment is high, and labor markets are lagging," while repeating his view that the economic recovery in the U.S. has started.
Futures contracts on the Chicago Board of Trade showed a 31 percent chance that the Fed will raise interest rates by June, down from 67 percent odds a month ago.
Gold climbed to a record and most global shares advanced for the first time in three days. Bullion for immediate delivery rose as much as 1.5 percent to $1,167.88 an ounce, and the MSCI World Index jumped 1 percent.

Outlook for Euro

Futures traders decreased bets the euro will strengthen against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed on Nov. 20.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 11,956 on Nov. 17, compared with 25,173 a week earlier.
Investors trying to protect gains at year-end won’t be enough to strengthen the dollar, and history shows the euro tends to rise against the U.S. currency in December, Steven Barrow, head of Group of 10 currency strategy in London at Standard Bank Plc, wrote in a research report today.

‘Ample Liquidity’

"The ample provision of global liquidity, through central- bank action and dollar weakness, is not turning around," Barrow wrote. "Given that the dollar has spent most of its life falling, a strong euro seasonal in December does not seem to be consistent with the idea of year-end profit taking."
The dollar will depreciate as much as 7.1 percent versus the euro, according to Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc and Scotia Capital Inc., the most accurate dollar forecasters.
The euro advanced against the yen for the first time in three days on speculation the European Central Bank will gradually end its stimulus measures. The ECB tightened last week the rules for the collateral it accepts against loans as it tries to restore the "proper functioning" of markets and prepares to slow unconventional liquidity programs.
"Most guesses are that the ECB will provide one or two six-month fixed-rate operations," Brown Brother Harriman & Co.
strategists led by Marc Chandler in New York wrote in a report today. "That overall shift in emphasis to looking at an exit policy should see the euro supported by interest-rate differentials against both dollar and sterling."
The euro extended its gains as reports showed Europe’s services and manufacturing industries expanded in November at the fastest pace in two years.
A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area rose to 53.7 this month from 53 in October, London-based Markit Economics said today in a statement. A reading above 50 indicates expansion.