BLBG: Dollar Falls From Almost Two-Month High as Fed Weighs Policy
By Ben Levisohn and Ye Xie
Dec. 16 (Bloomberg) -- The dollar declined from almost the strongest level against the euro since October on speculation the Federal Reserve may reiterate its pledge to keep the target lending rate at virtually zero for an extended period.
The greenback fell the most in three weeks against Norway’s krone after the Scandinavian nation’s central bank unexpectedly raised borrowing costs. Australia’s dollar slumped against all of its 16 major counterparts as Reserve Bank Deputy Governor Ric Battellino damped expectations for further rate boosts.
“There’s a little positioning ahead of the FOMC,” said Lauren Rosborough, a foreign-exchange strategist at Westpac Banking Corp. in London. “After the recent upbeat data, the market was speculating that the Fed could ratchet up the rhetoric, preparing for the tightening cycle. The market is going to be disappointed. It’s too early for the change.”
The dollar traded at $1.4582 per euro at 11:16 a.m. in New York, compared with $1.4538 yesterday, when it reached $1.4504, the strongest level since Oct. 2. The U.S. currency was little changed at 89.52 yen, compared with 89.61 yesterday, when it rose to 89.95, the highest level since Dec. 7. The yen bought 130.55 per euro, compared with 130.29.
Fed funds futures on the Chicago Board of Trade indicated a 51 percent chance that the central bank will raise its target lending rate by at least a quarter-percentage point by its June meeting, compared with 36 percent odds a month ago.
All 98 economists in a Bloomberg survey expect the policy- setting Federal Open Market Committee will keep the target lending rate at zero to 0.25 percent when it releases its statement at the close of its meeting today.
Bullish on Dollar
Investors turned bullish on the dollar for the first time since March as the U.S. economy showed evidence of a sustained recovery, a survey of Bloomberg users showed.
U.S. employers eliminated the fewest jobs in November since the recession began, and the unemployment rate fell to 10 percent, the Labor Department reported earlier this month. Housing starts rose 8.9 percent to an annual rate of 574,000, the Commerce Department said today.
Sentiment toward the greenback rose to 51.99 in December, according to the survey of Bloomberg users. The measure is a diffusion index, meaning a reading above 50 indicates Bloomberg users expect the dollar to strengthen. The reading was last above 50 in March, when it reached 53.41.
Norway’s krone advanced as much as 1.5 percent to 5.7373 versus the dollar after Norges Bank increased the target lending by a quarter-percentage point to 1.75 percent. It was the biggest intraday rally since Nov. 23, when the krone appreciated as much as 1.6 percent on an advance in crude oil.
Norwegian Rate
Two of the 13 economists surveyed by Bloomberg had forecast today’s boost in Norwegian borrowing costs, while the rest had predicted policy makers would leave lending rates on hold. In October, the central bank became the first in Europe to reverse an easing cycle since the credit crisis began.
Sweden’s krona appreciated as much as 0.9 percent to 7.1377 in the biggest intraday advance since Dec. 3 after the Riksbank said the “recovery in the economy is continuing.” Policy makers plan to leave the target lending rate at a record low 0.25 percent until “autumn 2010.”
“Clearly the tightening pace of the Norges Bank is going to be faster than other central banks and in particular compared with the Swedish Riksbank,” said David Deddouche, a foreign- exchange strategist at Societe Generale SA in Paris. “That makes the krone attractive.”
Stronger Pound
The pound rose 0.8 percent to $1.6398 after a report showed the U.K.’s unemployment unexpectedly fell for the first time since February 2008, adding to signs the economy is recovering from its worst slump in at least three decades. Claims for jobless benefits decreased by 6,300 in November to 1.63 million, the Office for National Statistics said.
European Central Bank council member Ewald Nowotny said he sees no need to raise the 1 percent target lending rate in the first half of 2010 as inflation pressures stay muted.
“Our interest-rate decisions are to be seen in connection with our price stability goal, and in this context I do not see major threats for price stability in the near future,” Nowotny, said in an interview in Vienna.
The euro has dropped 0.3 percent against the dollar this week on concern some of the region’s weakest economies will struggle to pay debt as their budget deficits increase.
Greece saw its debt rating cut this month to BBB+, the lowest in the euro region, by Fitch Ratings. The outlook on Spain’s AA+ debt rating was reduced to “negative” from “stable” by Standard & Poor’s.
To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net
