Dollar Gains as Fed Minutes Signal Unabated Tapering; Baht Falls

February 19, 2014

Sydney-Australia (Feb 19)  The dollar gained the most in three weeks after Federal Reserve policy makers signaled emerging-market turmoil and economic reports that have fallen short of forecasts won’t interrupt stimulus-tapering plans.

The U.S. currency strengthened versus most of its 16 major peers, including those of commodity producers Canada and Australia, as Treasury yields rose after “several” central bank officials said “there should be a clear presumption in favor of continuing” the pace of bond-buying reductions, barring a change in the economic outlook. Emerging-market currencies weakened as anti-government protests escalated in Ukraine and Thailand.

“We’re seeing the dollar strong against the Aussie and it’s already made some progress against Canada,” Steven Englander, global head of Group of 10 foreign-exchange strategy for Citigroup Inc. in New York. “The bond market, I think, is a bit nervous. The foreign-exchange market is taking it in stride, with a little dollar strength.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major counterparts, added 0.3 percent to 1,019.84 as of 3:42 p.m. in New York, reaching the largest increase since Jan. 30.

The yen added 0.1 percent to 102.25 per dollar after dropping 0.4 percent yesterday, and Japan’s currency rose 0.3 percent to 140.47 per euro. The dollar gained 0.2 percent to $1.3738 per euro after sliding to $1.3739.

Technical Considerations

The Canadian dollar is poised to test a 4 1/2-year low in a reversal of the rally that brought it to its highest level in a month, according to Royal Bank of Canada, citing technical factors.

The loonie, as the currency is known for the image of the aquatic bird on the C$1 coin, depreciated 1.2 percent to C$1.1084 per U.S. dollar. Australia’s currency weakened against the greenback for a third day, declining 0.3 percent to 90.04 U.S. cents.

The Thai currency fell for a second day as protesters fired guns and threw a grenade at police in Bangkok yesterday, injuring 33 officers. In Ukraine, clashes between police and anti-government activists killed at least 25 people and left hundreds injured in the bloodiest episode of the country’s three-month standoff.

The baht weakened 0.3 percent to 32.59 per dollar after slumping 0.6 percent yesterday. Ukraine’s hryvnia slid as much as 2.5 percent to 9.080 per dollar.

Yuan Trade

The People’s Bank of China plans to expand the yuan’s trading band this year in an “orderly” manner as it moves toward a more convertible currency.

The spot rate in Shanghai is currently allowed to fluctuate a maximum 1 percent on either side of a daily fixing set by the central bank. The trading band was last widened in April 2012 from 0.5 percent, and before that from 0.3 percent in May 2007. The currency weakened 0.2 percent 6.0764 versus the dollar.

The Bank of Japan yesterday doubled a funding tool to 7 trillion yen ($68 billion) and said individual banks may borrow twice as much low-interest money as previously under a second facility. It left unchanged a pledge to expand the monetary base by 60 trillion to 70 trillion yen per year.

Japan’s currency will tumble 11 percent to 115 per dollar in 2015, according to a Bloomberg survey of analysts, short of the 120 level economists estimate would be needed for consumer prices to reach the BOJ’s goal.

Fed Policy

Fed policy makers plan to soon change their guidance for the path of interest rates as unemployment declines toward a threshold for considering an increase in borrowing costs, minutes of their January meeting showed.

“Participants agreed that, with the unemployment rate approaching 6.5 percent, it would soon be appropriate for the Committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed,” according to the record of the meeting.

“There seems to be a consensus that they will change the language with respect to the unemployment rate,” Citigroup’s Englander said. “This suggests they are very much discounting the headline unemployment rate and looking for ways to back away from the focus on it. It ends up being dovish, not hawkish.”

The pace of U.S. home construction declined more than forecast in January, indicating an unusually harsh winter probably played a role in slowing projects. This year’s weather is causing the pace of U.S. economic growth to fall along with the mercury.

Source:  Bloomberg

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