Dollar Heads for Record Weekly Loss Versus Euro as Supply Rises

By Ron Harui

March 20 (Bloomberg) -- The dollar headed for a record weekly drop against the euro after the Federal Reserve unexpectedly said it will start buying Treasuries, ramping up supply of the currency.

The greenback traded near a two-month low versus the European currency and headed for a second weekly decline versus the yen as the Fed will boost its balance sheet by as much as $1.15 trillion through buying up to $300 billion of U.S. government debt and purchasing more mortgage bonds. The Australian and New Zealand dollars gained, heading for a third weekly advance, as prices of commodities the South Pacific nations export surged.

“The Fed is massively expanding the supply of dollars by buying government debt,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp., Australia’s biggest lender by market value. “They’re effectively printing money; we regard this as profoundly bearish for the dollar.”

The dollar traded at $1.3643 per euro as of 10:20 a.m. in Singapore from $1.3665 yesterday, when it touched $1.3738, the weakest level since Jan. 9. The U.S. currency has lost 5.2 percent this week, the most since the euro’s debut in 1999. The dollar was at 94.74 yen from 94.51 yesterday, set for a 3.3 percent loss this week. The euro was at 129.25 yen from 129.17 yesterday, after gaining 2 percent this week.

The Australian dollar rose to 68.64 U.S. cents from 68.51 cents yesterday, and headed for a 4.3 percent weekly advance. The New Zealand dollar climbed to 55.61 U.S. cents from 55.35 cents, and was set for a 6.1 percent gain this week. Trading in currencies may be more subdued than usual because of a national holiday in Japan today, Callow said.

Commodity Producers

Currencies of commodity producers such as the New Zealand dollar are leading the rally against the greenback, which has declined against all of the 16 most traded currencies over the past five days.

Silver jumped 13 percent yesterday, the most since 1979. gold had the biggest increase since September, and crude oil topped $52 a barrel as the Fed’s steps to revive the U.S. economy prompted speculation that demand for raw materials will increase as investors seek hedges against inflation.

“You saw a rally in the euro as well as commodity currencies,” said Thomas Harr, a senior currency strategist at Standard Chartered Bank in Singapore. “It’s related to the rebound in commodity prices over the last couple of weeks.”

Dollar Index

The trade-weighted Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, headed for its biggest decline since 1985 this week, as the Fed said on March 18 it would purchase Treasuries and an additional $750 billion of agency mortgage-backed securities.

“As the money-printing machine kicks into high gear, dollar devaluation should accelerate with a ballooning money supply,” Yilin Nie, New York-based currency strategist at Morgan Stanley, wrote in a research note yesterday. The Fed’s move “is a key negative for the dollar.”

The dollar index traded at 83.223 today from 83.129 yesterday, when it touched 82.631, the lowest since Jan. 9. It is poised for a 4.9 percent loss this week.

The dollar fell by the most in nine years versus the euro on March 18. Yields on 10-year Treasuries slid the most since 1962 the same day after the Fed said it would concentrate purchases in notes due from two to 10 years. The central bank is expanding its so-called quantitative easing policy to more than $1.85 trillion in securities. Fed Chairman Ben S. Bernanke will speak on “The Financial Crisis and Community Banking” at 9 a.m. in Phoenix, Arizona today.

‘Dollar Devaluation’

Morgan Stanley recommended investors buy the euro against the dollar at $1.3704, with a target of $1.45 and a stop-loss order at $1.30. A stop-loss order is an automatic instruction to sell or buy a currency should it reach a particular level.

The premium traders pay to buy call options on the euro versus the dollar over puts increased to a level indicating traders are more bullish on the European currency. A call option gives an investor the right to buy, while a put provides the right to sell.

The euro’s one-month 25-delta risk-reversal rate against the dollar rose to 1.0925 percent today from 1.0675 yesterday. The index had a negative reading as recently as March 10. Delta is the change in the value of an option for each dollar change in the market price of the underlying asset.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.