Dollar Falls Most in 13 Weeks Versus Yen on Dovish Fed

Washington (July 12)  The dollar fell the most versus the yen in 13 weeks as the Federal Reserve signaled willingness to keep borrowing costs at unprecedented lows even as the U.S. labor market improves.

Japan’s currency climbed against most of its 16 major peers and U.S. Treasuries gained as concern stress in Portugal’s banking sector may spread prompted demand for safer assets. The dollar fell versus most major counterparts after minutes of the Federal Open Market Committee’s June meeting failed to provide additional insight on the pace of rate increases. Central bank Chair Janet Yellen testifies before Congress July 15-16.

“Slightly dovish FOMC minutes was the first trigger,” said Masafumi Takada, a New York-based director at BNP Paribas SA. “Declining U.S. yields as well as ongoing geopolitical risk aversion are putting pressure on dollar-yen.”

The dollar fell 0.7 percent on the week to 101.30 yen in New York, the biggest drop since the period ended April 11. The U.S. currency weakened 0.1 percent to $1.3608 per euro. The yen rallied 0.6 percent to 137.90 per euro after appreciating to 137.50, the strongest since Feb. 6.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major counterparts, fell 0.1 percent to 1,006.89, its fourth drop in five weeks.

The benchmark U.S. Treasury 10-year note yield touched 2.49 percent, the lowest level since June 2, and fell 12 basis points this week, the most since March 14.

Winners, Losers

Indonesia’s rupiah was the biggest gainer among 31 major U.S. peers this week, jumping 2.5 percent on signs Joko Widodo won the nation’s presidential race. New Zealand’s dollar gained 0.8 percent. South Korea’s won lost 1 percent and the Chilean Peso dropped 0.9 percent to lead decliners.

Australia’s dollar pared its rally this week after reports July 10 showed the nation’s jobless rate climbed and imports by China, the South Pacific nation’s biggest trade partner, grew slower than forecast. The unemployment rate in Australia rose to 6 percent in June from a revised 5.9 percent, matching the highest since July 2003.

“The report increased the likelihood for the Reserve Bank of Australia to cut the cash target rate in coming meeting,” said Eimear Daly, the head of market analysis at London-based broker Monex Europe Ltd. “Yes, Australia has bubbling housing markets and elevated debt burden. But if you follow the current central-bank logic, taking a calculated risk is justified to try to get the whole economy back to health.”

The Aussie rallied 0.3 percent this week to 93.92 U.S. cents.

Crisis Reminder

The yen rose against most major peers as Banco Espirito Santo SA sought to reassure investors after a missed payment on short-term debt by a member of the Portuguese financial group roiled global markets. Portugal’s central bank said the lender is protected.

“The Portugal Espirito Santo news was a large driver of equity weakness yesterday and reminded markets of the sovereign credit issues we had in the European financial crisis not too long ago,” Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said July 11. Euro-dollar “completely shrugged it off.”

Japan’s currency rose 0.7 percent in the past week according to data by Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The greenback dropped 0.2 percent, while the euro declined 0.1 percent. New Zealand’s dollar jumped 0.7 percent to lead gainers, while the Canadian dollar’s 1 percent slump paced decliners.

Fed Minutes

The Bloomberg Dollar Spot Index dropped the most this month on July 9 as the release of the minutes of the FOMC’s June 17-18 meeting offered no new clues on the timing of an interest-rate increase, with officials saying policy depends most “on the evolution of the economic outlook.”

Yellen is scheduled to testify before the Senate Banking Committee in Washington on July 15 and the House Committee on Financial Services the following day.

Jobless claims declined by 11,000 to 304,000 in the week ended July 5, the fewest in more than a month, a Labor Department report showed in Washington. Combined with data last week that showed payrolls exceeded expectations in June and the unemployment rate fell to an almost six-year low, the drop in firings signals a rebound in second-half economic growth.

‘Risk Positive’

“The recent minutes and speeches suggested that the FOMC was not sufficiently concerned about the inflation surge and asset prices to alter monetary policy and that seems the most likely outcome from the testimony,” Steven Englander, global head of Group of 10 foreign-exchange strategy at Citigroup Inc. in New York, said in a report. “In consequence, the U.S. side will probably be USD negative and risk positive.”

There’s a less than 50 percent chance the Fed will raise its benchmark rate to at least 0.5 percent by July next year, down from 62 percent odds on July 4, according to data compiled by Bloomberg based on fed funds futures.

JPMorgan Chase & Co.’s Global FX Volatility Index rose to 5.6 percent on July 10, the highest since June 26. The gauge declined to 5.29 percent on July 3, the lowest close since Bloomberg started collecting the data in 1992.

“Most of the damage was seen in the volatility space in foreign exchange, which did rise from recent record lows,” Faros’s Bechtel said. “So while spot FX was well-contained, volatility did rise a bit to reflect the concern.”

Source: Bloomberg