Currency volatility falls to 10-week low on Fed bets

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.

Fed Survey

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.

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