Dollar Weakens on Speculation Fed to Maintain Stimulus Measures

By Matthew Brown and Ron Harui

Nov. 23 (Bloomberg) -- The dollar fell for the first time in three days against the euro on speculation the Federal Reserve will keep its stimulus measures in place and ensure interest rates remain low.

The U.S. currency slid against all but one of its 16 major counterparts after Fed Bank of St. Louis President James Bullard said in New York yesterday that he supported extending the central bank’s purchases of mortgage-backed securities beyond the first quarter of next year. The yen weakened as commodities and stocks advanced, boosting demand for higher-yielding currencies such as the South African rand.

“The central bank language at the moment is still pretty dovish and that’s making riskier assets more attractive than the dollar into the end of the year,” said Mark O’Sullivan, director of dealing in London at Currencies Direct Ltd.

The dollar weakened the most in two weeks to $1.4975 per euro as of 10:41 a.m. in London, from $1.4862 in New York last week. The yen depreciated to 133.10 versus the euro, from 132.09, and was unchanged at 88.88 per dollar. The South African rand was the biggest gainer versus the dollar, strengthening 1.5 percent to 7.4960.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, declined 0.8 percent to 75.078. It slid to 74.679 on Nov. 16, the lowest level since August 2008.

Fed’s Bullard

U.S. policy makers repeated on Nov. 4 that they will complete the Fed’s planned $1.25 trillion in purchases of mortgage securities by March and said they will buy $175 billion of agency debt, down from a previous maximum of $200 billion. They kept their benchmark rate in a range of zero to 0.25 percent and repeated borrowing costs will stay low for an “extended period.”

In his speech, Bullard said “unemployment is high, and labor markets are lagging,” while repeating his view that the economic recovery in the U.S. has started.

Futures contracts on the Chicago Board of Trade on Nov. 20 showed a 32 percent chance the Fed raise rates by June, down from 68 percent odds a month ago.

The yen and dollar also declined as gold climbed to a record and shares advanced for the first time in three days. Bullion for immediate delivery rose as much as 1.5 percent to $1,167.88 an ounce, and the MSCI World Index jumped 0.9 percent.

Low Rates

Benchmark interest rates are as low as zero in the U.S. and 0.1 percent in Japan, compared with 3.5 percent in Australia, attracting investors to the South Pacific nation’s higher- yielding assets.

Futures traders decreased bets the euro will strengthen against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed on Nov. 20.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 11,956 on Nov. 17, compared with 25,173 a week earlier.

Investors locking in gains in December won’t be enough to strengthen the dollar into year-end, and history shows that the euro tends to rise against the U.S. currency in December, Steven Barrow, head of group of 10 currency strategy in London at Standard Bank Plc, wrote in a research report today.

‘Ample Liquidity’

“The ample provision of global liquidity, through central- bank action and dollar weakness is not turning around,” Barrow wrote. “Given that the dollar has spent most of its life falling, a strong euro seasonal in December does not seem to be consistent with the idea of year-end profit-taking.”

The euro advanced against the yen for the first time in three days on speculation the European Central Bank will gradually end its stimulus measures. The ECB last week tightened the rules for the collateral it accepts against loans as it tries to restore the “proper functioning” of markets and prepares the ground to slow unconventional liquidity programs.

“Most guesses are that the ECB will provide one or two six-month fixed rate operations,” Brown Brother Harriman & Co. strategists led by Marc Chandler in New York wrote in their daily currency report today. “That overall shift in emphasis to looking at an exit policy should see the euro supported by interest-rate differentials against both dollar and sterling.”

The euro extended its gains as reports showed Europe’s services and manufacturing industries expanded at the fastest pace in two years in November.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area rose to 53.7 from 53 in October, London-based Markit Economics said today in a statement. A reading above 50 indicates expansion. Economists had projected the index would rise to 53.4, according to the median of 16 estimates in a Bloomberg News survey.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Ron Harui in Singapore at =1161 or rharui@bloomberg.net