Dollar drops before Fed votes on added stimulus, Moody’s warns

The dollar fell against all of its 16 most-traded counterparts before the Federal Reserve starts a two-day meeting tomorrow amid speculation it will buy bonds to boost the economy.

The U.S. currency declined to its lowest level in almost four months versus the euro after Moody’s Investors Service said the country’s Aaa rating may be cut if it doesn’t reduce its ratio of debt to gross domestic product. The 17-nation euro gained after Germany’s top constitutional court said it will proceed with a ruling on the country’s role in the European Stability Mechanism bailout fund.

“The dollar is in a bad place right here,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “The atmosphere has shifted against it very quickly. A more accommodating Fed, diminished tail risk out of Europe and now this ratings downgrade risk add to the mix of negatives that are engulfing the dollar.”

The dollar fell 0.8 percent to $1.2861 at 3:57 p.m. New York time, touching the lowest level since May 14. The greenback slid 0.7 percent to 77.74 yen, reaching the weakest level since June 1. The euro rose 0.1 percent to 99.97 yen.

Chart Levels

The euro may strengthen to a four-month high against the dollar, according to Bank of America Merrill Lynch. The 17- nation currency could appreciate to $1.2975 to $1.3000 if it closes above the key resistance level from $1.2830 to $1.2850, MacNeil Curry, chief rates and currencies technical strategist in New York at the firm, wrote to clients today.

The shared currency moved above its 200-day moving average of $1.2835 for the first time since Oct. 31.

The implied volatility of three-month options for Group of Seven currencies touched 7.81 percent, the lowest since October 2007, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.

Canada’s dollar strengthened for a fourth day, climbing to a 13-month high versus its U.S. counterpart, on optimism measures by policy makers in the U.S. and Europe will reduce volatility.

The loonie, as the currency is named after the image of the waterfowl on the C$1 coin, appreciated 0.5 percent to 97.32 cents per dollar. It touched 97.14, the strongest since Aug. 4, 2011.

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