Dollar Snaps Record Weekly Rally as Fed Rate Increase Bets Pared

New York (Oct 11)   The dollar snapped the longest weekly rally since the collapse of the Bretton Woods system in 1971 after the Federal Reserve expressed concern the currency’s strength posed a risk to the U.S. economic outlook.

Hungary’s forint and South Africa’s rand led gains against the greenback on optimism U.S. policy makers won’t accelerate increases in record low borrowing costs that have supported global growth. Russia’s ruble tumbled for a fourth week on sanctions and an oil-price slump, while Hungary’s forint rallied after the economy minister said the government needs a “favorable” exchange rate to cut public debt.

“This has been a very interesting week -- with the dollar, number one is clearly the minutes that we saw,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., said in a phone interview. “What was really notable was the prominence the dollar got in the minutes in terms of Fed policy discussions.”

The U.S. Dollar Index, which Intercontinental Exchange Inc. uses the gauge to track the greenback against the currencies of six trade partners, fell 0.9 percent to 85.91 this week. It reached 86.75 on Oct. 3, the highest level since June 2010.

The index had rallied for 12 straight weeks, the longest since at least 1971 when currencies began to float after the U.S. abandoned the Bretton Woods system that pegged the dollar to the price of gold.

The greenback fell 0.9 percent to $1.2628 per euro, the biggest weekly decline in six months. The U.S. legal tender dropped 1.9 percent to 107.66 yen, while Europe’s single currency slipped 1 percent to 135.96 yen.

Hedge funds and other large speculators raised their net bullish dollar bets versus eight of its major peers to a record 313,878 contracts as of Oct. 7, compared with 281,204 a week earlier, according to data from the Washington-based Commodity Futures Trading Commission.

Russian Intervention

Russia’s central bank stepped up the pace of currency interventions as sanctions and an oil-price slump spur bets policy makers will raise interest rates. The ruble slumped 0.9 percent to 40.3250 per dollar, extending its losses to 9.2 percent since the end of August.

The central bank sold $1.5 billion on Oct. 8, according to data on its website yesterday. That’s almost as much as the previous three days combined and the most for a single day since the $4.41 billion intervention that preceded the Crimea referendum to join Russia in March.

“The population is starting to watch the currency more closely,” VTB Capital analysts Vladimir Kolychev and Daria Isakova said in an e-mailed note. “This kind of herd behavior is usually only broken by decisive action from the regulator,” such as a rate increase or “bolder” currency-market support, they said.

Favorable Rate

The forint rallied 2.3 percent to 241.95 versus the dollar after Economy Minister Mihaly Varga said Oct. 3 that “we hope a favorable exchange rate will emerge at the end of the year.”

Hungary plans to lower its public debt to 76.9 percent of economic output by the end of 2014 from 77.3 percent last year. Forty-one percent of the nation’s liabilities in 2013 were denominated in foreign currency, government data show.

Emerging-market currencies had the biggest weekly advance since June as signs the Fed may delay raising interest rates buoyed demand for developing-nation assets. A Bloomberg gauge with equal weightings of the dollar’s 20 most-traded developing-market peers gained 0.3 percent to 87.32.

Federal Open Market Committee participants said growth “might be slower than they expected if foreign economic growth came in weaker than anticipated,” according to minutes of the Sept. 16-17 meeting released on Oct. 8. Officials also expressed concerns a “further appreciation of the dollar and have adverse effects on the U.S. external sector.”

Rate Speculation

The FOMC last month retained a pledge to keep interest rates near zero for a “considerable time” after it concludes an asset purchase program that’s due to end after its October meeting. Policy makers forecast rate increases in 2015.

Traders see about a 33 percent chance the Fed will raise its benchmark rate by its July 2015 meeting, down from a 59 percent on Sept. 18, fed funds futures data compiled by Bloomberg show. The target rate has been at zero to 0.25 percent since December 2008 to support the economy.

The Fed, which next meets Oct. 28-29, is on track to end a program of stimulatory bond purchases this month.

“There was some wording that the strong dollar in the last month or so has put a damper on inflation,” Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a telephone interview. “It kind of looks like the Fed will take any excuse not to normalize rates in the near term.”

Source: Bloomberg