A gauge of volatility among Group of Seven currencies slid to a 10-week low on speculation that the Federal Reserve won’t rush to increase interest rates as the U.S. central bank winds down its bond-buying program.
The Bloomberg Dollar Index snapped two days of losses as a survey showed more economists are predicting that Chairman Ben S. Bernanke will trim the Fed’s monthly bond buying by $20 billion in September. The Swiss franc and the yen weakened after the Beijing News reported that China’s premier Li Keqiang said 7% growth is the minimum policy makers will tolerate, damping demand for the safest assets. Indonesia’s rupiah fell the most in more than a year.
“The tapering story has calmed down for the moment,” said David Bloom, the global head of currency strategy at HSBC Holdings Plc in London. “Volatility is low but at any time it could explode upward. It feels calm but I think people are very wary of this calmness.”
JPMorgan Chase & Co.’s G-7 FX Volatility Index, a measure of currency fluctuations, declined to 9.2% at 9:11 a.m. New York time, the lowest level since May 9. The gauge has dropped for nine consecutive days.
The Bloomberg Dollar Index, which tracks the U.S. currency against 10 trading partners, rose as much as 0.2% to 1,030.50 before trading at 1,029.03. It fell yesterday to the lowest level since June 20. The index reached 1,056.33 on July 8 after Bernanke said in the prior month that the central bank’s bond purchases may slow this year and stop in mid-2014.
The Fed will reduce its monthly bond purchases to $65 billion in September from the current pace of $85 billion, according to half of the economists in a July 18-22 survey, up from 44% in last month’s poll.
The dollar strengthened 0.3% to 99.97 yen after earlier touching 99.15, the lowest level since July 17. It was little changed at $1.3186 per euro. The yen slid 0.3% to 131.84 per euro.
Even as predictions of a September taper rose, the Bloomberg Dollar Index fell last week after Bernanke said reducing bond-buying wouldn’t constitute policy-tightening.
“The market is getting used to the idea that tapering is not tightening,” said Jane Foley, senior currency strategist at Rabobank International in London. “The main message is accommodation and that’s a bearish factor for the dollar.”
The Fed buys $85 billion of debt each month as part of its quantitative-easing stimulus to cap borrowing costs, a strategy that typically debases currencies. It has held the benchmark interest-rate target unchanged at between zero and 0.25% since 2008 to support the economy.
The dollar remained higher versus the yen as the Federal Housing Finance Agency reported house prices in the U.S. rose 0.7% in May, following a revised 0.5% advance the previous month. Economists in a Bloomberg survey forecast an increase of 0.8%.
The dollar has risen 4.8% this year, versus the euro’s 4.7% advance and lagging behind only the Swedish krona among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen is the worst performer, having dropped 11%.
The Japanese currency weakened against most of its major peers today, and Switzerland’s franc declined after Chinese news organizations reported that Premier Li Keqiang’s government sees 7% growth as the minimum acceptable pace of growth, signaling the nation will act to support the economy if needed.
Expansion below 7% won’t be accepted because China needs to achieve a moderately prosperous society by 2020, according to a commentary published July 21 by the official Xinhua News Agency and credited to reporter Wang Yuewei. Li said at a recent meeting with economists that 7% is the “bottom line” and the nation can’t allow growth below that, the Beijing News reported today.
The Swiss franc fell 0.4% to 94.01 centimes per dollar and 1.2390 per euro.
Indonesia’s rupiah plunged in onshore trading as Bank Indonesia allowed a more rapid slide toward levels quoted in the offshore market.
The rupiah dropped 1.3% to 10,200 per dollar, the biggest drop since June 2012, according to prices from local banks. The currency reached 10,258 earlier, the weakest level since July 14, 2009.