Dollar Falls Most Since May on Bets Fed Will Keep Pledge

Washington (Sept 16)  The dollar fell the most against its major peers in four months on speculation the Federal Reserve will maintain a pledge to keep interest rates low for a “considerable time” in its policy statement tomorrow.

The greenback has gained more than 3 percent the past four weeks as investors anticipated a strengthening economy would prompt policy makers to drop the guidance on keeping interest rates low. The gains were pared today after Wall Street Journal reporters speculated during a webcast that the language would be retained. Canada’s dollar rallied after the nation’s factory sales increased to a record. Brazil’s real climbed.

“The market was caught a little, but overall some long-dollar squaring ahead of the Fed shouldn’t be surprising,” Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA, said in an e-mail. “Changing the language would be a strong signal, so they may prefer to wait until they are closer to actually raising rates.” Long positions are bets a currency will rise.

The Bloomberg Dollar Spot Index dropped 0.3 percent to 1,047.26 at 3:22 p.m. in New York and fell as much as 0.5 percent, the most on an intraday basis since May 6. It climbed earlier to 1,052.14, matching yesterday’s level, the highest since July. The gauge tracks the dollar against 10 major peers.

The dollar declined 0.2 percent to $1.2962 per euro, and the yen fell 0.2 percent to 138.92 per euro. The U.S. currency was little changed at 107.18 yen after rising 0.1 percent to 107.33 yen and falling 0.4 percent to 106.81. It touched 107.39 yen on Sept. 12, the highest since Sept. 22, 2008.

A measure of foreign-exchange market volatility was at almost a five-month high. JPMorgan Chase & Co.’s Global FX Volatility Index was at 7.62 percent after reaching 7.65 percent yesterday, the highest on a closing basis since April 1.

Loonie Climbs

The Canadian dollar, nicknamed the loonie for the image of the bird on the C$1 coin, rose versus most of its 16 major peers after Statistics Canada reported factory sales rose 2.5 percent, more than forecast, to C$53.7 billion ($48.6 billion). It rallied 0.7 percent to C$1.0976 per U.S. dollar after depreciating yesterday to C$1.1099, the weakest since March 27.

Bank of Canada Governor Stephen Poloz has said a shift to growth powered by exports and business investment rather than consumers is key to erasing slack in the nation’s economy.

Brazilian Election

Brazil’s real climbed the most this month on speculation a new voter poll will show reduced support for President Dilma Rousseff amid a recession and above-target inflation.

The real gained as much as 1 percent, the biggest intraday jump since Aug. 26, to 2.3192 per U.S. dollar before trading at 2.3267, up 0.7 percent.

According to a Vox Populi poll published yesterday, Rousseff would be tied with candidate Marina Silva in a probable Oct. 26 election runoff. Poor management of the economy under Rousseff is responsible for a recession in the first half of this year and inflation, according to Silva.

The U.S. central bank’s policy-setting Federal Open Market Committee began a two-day meeting. Policy makers are considering the timing of interest-rate increases and whether to revamp its public guidance on the path of rates.

The Fed has said since March rates would stay low for a period after it completes a bond-buying program under the quantitative-easing stimulus strategy. Policy makers in July reduced monthly bond purchases to $25 billion in their sixth consecutive $10 billion cut, on track to conclude the program by year-end.

Fed Bets

Fed funds futures data compiled by Bloomberg showed traders saw a 76 percent chance U.S. policy makers will raise the target for overnight loans between banks by their September 2015 meeting, up from 73 percent on Aug. 29. The target rate has been in a range of zero to 0.25 percent since December 2008.

“The Fed is cautious, they haven’t quite fulfilled all of their targets,” Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a phone interview. “It’s unlikely we’re going to see a hawkish Fed here.”

The dollar rose 3.1 percent in the past month in a basket of 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes, the best performer. The yen fell 2 percent, the biggest loser, and the euro declined 0.6 percent. The Swiss franc also fell 0.6 percent.

The franc, traditionally a haven currency, rose 0.1 percent today to 1.2087 per euro. It approached the 1.20 per-euro cap imposed by the Swiss National Bank, intensifying speculation the central bank will need to intervene to weaken the currency.

“Since September 2012, the Swiss National Bank hasn’t been forced to intervene in currency markets to prevent the Swiss franc from a renewed appreciation to avoid an unwarranted tightening of monetary conditions,” analysts led by Carl Hammer, chief foreign-exchange strategist at SEB AB in Stockholm, wrote in a report. “The SNB must be highly alert that upward pressures on the franc could intensify further, making another round of interventions inevitable.”

Source:  Bloomberg