Dollar Trades Near Two-Month Low on Fed’s Purchase of Debt

By Ye Xie
March 20 (Bloomberg) -- The dollar traded near the lowest level against the euro since January on bets the Federal Reserve’s plan to buy Treasuries will push down yields on U.S. assets and prompt investors to seek returns elsewhere.
The U.S. currency dropped yesterday to the lowest versus Norway’s krone since October and depreciated against the pound as the Fed started flooding the market with greenbacks. Goldman Sachs Group Inc. raised the target on its bet against the dollar to $1.40 per euro yesterday after the greenback plunged on March 18 the most since the 16-nation currency’s 1999 debut.
“Risky assets rallied, and the dollar was hit,” said London-based Momtchil Pojarliev, head of currency at Hermes Pensions Management Ltd., which has about $70 billion in assets under management. “The market doesn’t like quantitative easing. I think the dollar will remain weak.”
The dollar traded at $1.3665 per euro at 6:13 a.m. in Tokyo, after declining 1.4 percent yesterday, when it touched $1.3738, the weakest level since Jan. 9. The U.S. currency was at 94.48 yen, after falling 1.8 percent yesterday and reaching 93.54, the lowest since Feb. 23. The euro traded at 129.08 yen, following a 0.4 percent drop. The dollar was at $1.4508 per pound after decreasing 1.6 percent.
Currencies of commodity producers such as the Norwegian krone led the rally against the dollar yesterday. The krone gained as much as 4 percent to 6.2866 per dollar, the strongest level since Oct. 15.
Crude oil, Norway’s biggest export, exceeded $50 a barrel for the first time in two months, while gold had its biggest gain since September.
Outlook for Inflation
“We may end up with higher inflation down the road, and people need to buy real productive assets, which the U.S. doesn’t have,” said New York-based David Tien of Fischer Francis Trees & Watts, who helps oversee funds that were worth an estimated $22 billion in December. “The biggest winner will be commodity currencies followed by the euro.”
The greenback may trade in “high $1.40 areas” versus the euro in the next three to six months, according to Tien. The U.S. currency lost 10 percent in the first half of December after the Fed first brought up the prospect of quantitative easing. In such a practice, a central bank uses injections of funds into the economy as its main policy tool.
Goldman Sachs stepped up its bet against the dollar, a trade it recommended on Feb. 19 when the U.S. currency was at $1.2570, according to a note sent to clients yesterday titled “Let the Printing Press Roll.”
Rate Spreads
“U.S. rate differentials are turning much less dollar- supportive,” wrote Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London.
The yield on the 10-year Treasury note increased 0.06 percentage point to 2.60 percent yesterday after tumbling on March 18 by the most since January 1962. The rate was 0.46 percentage point lower than that of the comparable-maturity German bund. The gap widened from 0.18 percentage point three days ago.
The ICE’s Dollar Index slid for an eighth day yesterday, the longest stretch in a year, after the Federal Open Market Committee said on March 18 it would purchase up to $300 billion in Treasuries and an additional $750 billion of agency mortgage- backed securities.
The premium traders pay to buy call options on the euro versus the dollar over puts rose to a level indicating traders are the most bullish on the European currency in at least five years. A call option gives an investor the right to buy, while a put provides the right to sell.
Risk Reversal
The euro’s one-month 25-delta risk-reversal rate against the dollar reached 0.9675 percent yesterday, the highest since October 2003, when Bloomberg began compiling the data. The index had a negative reading as recently as March 12. A delta is the change in the value of an option for each dollar change in the market price of the underlying asset.
The dollar may reassert itself as the global economy continues to shrink, prompting investors to buy the world’s reserve currency for safety, according to Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, which has $12 trillion in assets under custody.
“We are not convinced yet this is going to result in sustained weakness of the dollar,” said Blake. “Quantitative easing is not something that works automatically on the economy and won’t necessarily lead to bank lending. I am not convinced recovery is here. There will be ugly data to come.”
The Philadelphia Fed’s general economic index increased to minus 35 in March from minus 41.3 a month earlier, indicating manufacturing in the region contracted for a sixth month.
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
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