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Saturday, October 17, 2009

Dollar Touches 14-Month Low on Outlook for Fed’s Target Rate

The dollar dropped the most against the euro in more than a month and reached a 14-month low on speculation the Federal Reserve will trail other central banks in boosting interest rates.

Sterling rose against all of its major rivals this week on signs the Bank of England may suspend quantitative easing, reducing concern it’s flooding the market with new currency. The dollar slid as minutes of the Fed’s September meeting showed some policy makers were open to boosting purchases of mortgage- backed securities. The greenback may extend its decline when the central bank releases its Beige Book business survey next week.

“There’s no good news for the dollar,” said Dale Thomas, head of currencies in London at Insight Investment Management, which oversees about $121 billion. “The underlying trend is still for a gradual recovery of the global economy and a weak dollar.” The dollar will remain a “funding currency” for investors to buy higher-yielding assets as U.S. borrowing costs stay low, Thomas said.

The dollar fell 1.2 percent this week to $1.4905 per euro, from $1.4732 on Oct. 9, in the biggest drop since a 1.9 percent decline during the week ended Sept. 11. The U.S. currency touched $1.4968 on Oct. 15, the weakest level since Aug. 13, 2008. The yen declined 1.2 percent to 90.89 versus the dollar, from 89.78, in its biggest decline since Aug. 7. Japan’s currency depreciated 2.3 percent to 135.48 per euro, compared with 132.25 a week earlier.

Weaker Yen

The yen fell against all of its 16 most-traded counterparts tracked by Bloomberg on speculation Japanese investors will send money overseas for higher returns and the government won’t support a strong currency.

Finance Minister Hirohisa Fujii told reporters in Osaka on Oct. 15 that governments are responsible for ensuring the stability of their currencies, which “need to reflect the strength” of economies.

“The shift in Japanese currency policy has broken the relationship between the yen and risk, but the boost to sentiment already looks to be fading,” Todd Elmer, a currency strategist at Citigroup Inc. in New York, wrote in a research note this week. “The erosion of support from official rhetoric on the exchange rate should leave the yen more vulnerable to negative underlying fundamentals and a potential acceleration in capital outflows.”

The Australian dollar rose 1.5 percent this week and touched 92.70 U.S. cents yesterday, the strongest level since August 2008, after Reserve Bank Governor Glenn Stevens said on Oct. 15 he can’t be “too timid” in tightening policy.

Australia’s Rate

Stevens became the first Group of 20 central banker to increase borrowing costs when he unexpectedly boosted the overnight cash target last week by a quarter-percentage point to 3.25 percent from a half-century low. The target rate compares with 0.1 percent in Japan and zero to 0.25 percent in the U.S.

Banks including Barclays Capital, BNP Paribas SA, Morgan Stanley and St. George Bank Ltd. signaled the Australian currency may rise to parity with the U.S. dollar.

Sterling climbed 3.2 percent to $1.6356 in its biggest advance since May 22 after the Financial Times reported this week that Bank of England Markets Director Paul Fisher said policy makers would be more likely to suspend asset purchases. Rising asset prices and improved confidence may signal the program is working, Bank of England Deputy Governor Charles Bean said this week.

The pound is “undervalued” as the currency market is underestimating the potential for rate increases by the Bank of England, according to Deutsche Bank AG, the world’s biggest currency trader.

‘Economic Slack’

The dollar declined versus the euro this week as minutes from the Federal Open Market Committee’s Sept. 22-23 meeting showed some policy makers thought an increase in purchases of mortgage-backed securities might “reduce economic slack more quickly.” Fed Vice Chairman Donald Kohn said this week that slow growth warrants very low interest rates for an “extended period.”

The central bank will release its Beige Book business survey on Oct. 21.

The euro’s appreciation against the dollar will be discussed at a meeting of euro-area finance ministers in Luxembourg on Oct. 19, said Luxembourg’s Jean-Claude Juncker, who heads the so-called eurogroup and also serves as his nation’s prime minister.

“We’ll tell you after the meeting if there’s something new to be said, a kind of extension to the normal poem,” Juncker said yesterday. “But I guess the poem will stay as the poem was,” adding that “we don’t like excessive volatility in exchange rates and disorderly movements.”

The dollar’s “trough” will be “slightly deeper” than previously estimated, Goldman Sachs Group Inc. said in a research report this week, forecasting it will depreciate to $1.55 versus the euro in three and six months before recovering to $1.35 in a year. That compares with previous forecasts of $1.45 in three and six months.

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