The dollar gained the most in almost four weeks after Federal Reserve officials confirmed they will end their bond-purchase program amid improved labor-market conditions.
The greenback rose to a three-week high versus the yen, while emerging-market currencies declined, as traders pushed up odds for an interest-rate increase next year even as the Federal Open Market Committee maintained its pledge to keep borrowing costs low for a “considerable time.” Norway’s krone dropped as retail sales unexpectedly declined.
“The FOMC played up the strength of the labor market, and downplayed the extent to which lower inflation expectations were likely to impact long-term inflation and by extension policy,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG in New York, wrote in an e-mail. “The response has been a clear-cut stronger USD.” The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, climbed 0.6 percent to 1,069.40 as of 3:45 p.m. in New York, the biggest jump since Oct. 3. It earlier dropped 0.2 percent.
The greenback rose 0.7 percent to 108.89 yen and touched 108.95, the highest since Oct. 7. It rallied 0.7 percent to $1.2641 per euro after declining 0.7 percent in the previous three days. Japan’s currency climbed 0.1 percent to 137.64 per euro after reaching 138.03, the weakest since Oct. 1. The odds of borrowing costs going up by October 2015 climbed to 61 percent, from 51 percent before the Fed announcement, based on futures prices.
EM Selloff
The prospect of higher interest rates in the world’s biggest economy hurts the appeal of emerging-market assets, with an index with equal weightings of 20 major developing currencies dropping 0.2 percent after earlier gains.
Hungary’s forint slumped 0.9 percent to 244.64 per dollar, while South Africa’s rand declined 0.9 percent to 10.9389.
The Norwegian krone led losses among the dollar’s 31 major counterparts as retail sales shrank 0.1 percent in September from a 0.6 percent gain the previous month, data from Statistics Norway showed today. That compares with the median prediction of a 0.7 percent gain in a Bloomberg survey of economists. The jobless rate increased to 3.7 percent in August, from 3.4 percent the prior month, another report showed.
The krone slid 1.3 percent to 6.7007 versus the dollar and reached 6.7156, the weakest since June 2010. It depreciated 0.6 percent to 8.4711 per euro.
‘Job Gains’
“Labor-market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the FOMC said today in a statement in Washington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that “there remains significant underutilization of labor resources.”
The dollar index had been headed for its first monthly decline since June on concern slowing global growth and rising risks of disinflation will spill over into the U.S., prompting traders to push out their bets on the timing of the Fed’s rate increase. Policy makers have kept their key interest rate at zero to 0.25 percent since December 2008.
“The market had a little fit in the first half of October and pushed the fed-funds expectations, the first hike, out six months,” Greg Anderson, head of global foreign-exchange strategy in New York at Bank of Montreal, said by phone. “The Fed has just come back and said they’re looking at the fundamentals and gathered everybody back to June again.”
Dollar ‘Positive’
The U.S. economy will expand 2.2 percent this year and 3 percent in 2015, according to another Bloomberg survey. The euro area will grow 0.8 percent and 1.2 percent, while Japan’s economy will expand 1 percent in 2014 and 1.2 percent the following year, the surveys predict.
The U.S. may have added 225,000 jobs this month, at just about the average monthly gain this year of 227,000, according to a Bloomberg News survey of economists before the Nov. 7 Labor Department report. The unemployment rate is projected to be unchanged at 5.9 percent, the lowest level since July 2008.
“I can see a rate hike in the first half, based on the statement and the labor metrics,” Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a telephone interview. “The market absorbed the statement as being positive for the dollar.”
Swiss Franc Volatility Stirs as SNB Vote Raises Cap Risks
A referendum the Swiss National Bank says will impede its ability to conduct monetary policy is contributing to bets on greater price swings in the franc on concern its currency cap may be at risk. Two-month implied volatility on the euro-franc exchange rate is the highest since 2012 relative to a one-month gauge. That reflects a growing price premium for options linked to the currency for the period including the vote on the SNB’s assets. The referendum, which the SNB says would make it hard to fulfill its mandate, is due on Nov. 30.
If passed, the proposal would require the central bank to hold at least 20 percent of its assets in gold, among other measures. The SNB held foreign-exchange reserves of 462.2 billion francs ($488 billion) at the end of September with total assets of about 522 billion francs. The risk is that it would become more difficult for the central bank to defend its cap by amassing more foreign exchange. The SNB may also need to use its currency reserves to buy gold.
“Should this go through it’s going to have profound effects on the SNB’s ability to hold the floor,” said Peter Rosenstreich, the chief foreign-exchange analyst at Swissquote Bank SA in Gland, Switzerland. “Looking out at the volatility curve you’re starting to see people are pricing it in. Not tomorrow, but two or three months down the line, people are expecting something to happen.”
The franc has strengthened 1.8 percent against the euro this year as the European Central Bank lowered interest rates to records and started an unprecedented program of private asset purchases. That’s moving it closer to the 1.20 francs per euro cap imposed by the SNB to limit the currency’s appreciation. It was at 1.20594 francs per euro at 5:08 p.m. London time today.
Implied volatility on two-month options for euro-franc slipped to 3.53 percent today. While that’s above its 2.81 percent average for the year, it’s down from a record-high of 28.07 percent in August 2011. The one-month implied volatility declined to 2.54 percent. The premium for two-month options to buy the euro against the franc versus those allowing for sales dropped to 0.24 percentage points today, the least since Sept. 30, 25-delta risk reversals show.
The SNB set its currency limit in September 2011 after investors anxious about the euro-area debt crisis pushed the franc nearly to parity with the single currency. It hasn’t intervened to defend it since September 2012.
Fed Cites Improved Labor Market While Ending QE as Planned
The Federal Reserve said it sees further improvement in the labor market while confirming it will end an asset-purchase program that has added $1.66 trillion to its balance sheet.
“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the Federal Open Market Committee said today in a statement in Washington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that referred to “significant underutilization” of labor resources.
Policy makers maintained a pledge to keep interest rates low for a “considerable time.” While saying inflation in the near term will probably be held down by lower energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
Stocks extended losses after the Fed announcement. The Standard & Poor’s 500 Index fell 0.8 percent to 1,969.29 as of 2:17 p.m. in New York. The benchmark 10-year Treasury note yielded 2.35 percent, up 5 basis points from yesterday.
Chair Janet Yellen is completing two years of bond purchases that started under her predecessor, Ben S. Bernanke, as the Fed nears its goal for full employment. She must now chart a course toward the first interest-rate increase since 2006 while confronting risks from a slowing global economy and declining inflation. The FOMC repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since December 2008. Most Fed officials expect to raise the rate next year, according to projections released last month.
Reinvesting Proceeds
The Fed said it will continue reinvesting proceeds from a balance sheet that swelled to a record $4.48 trillion in the course of three rounds of so-called quantitative easing that started in November 2008 during the longest and deepest recession since the 1930s. The latest round was announced in September 2012, with monthly purchases of $85 billion in Treasuries and mortgage-backed securities. The Fed began a step-like reduction of purchases in January 2014, cutting them by $10 billion per meeting.
Minneapolis Fed President Narayana Kocherlakota dissented, saying that with low inflation expectations the Fed should commit to keeping rates low “at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset-purchase program at its current level.” As the Fed winds down unprecedented stimulus, the European Central Bank is contemplating its own quantitative easing program to tackle the weakest inflation in five years, and Japan is continuing purchases.
Bright Spot
“The U.S. is a big bright spot in the world,” said Stephen Cecchetti, professor of international economics at Brandeis International Business School in Waltham, Massachusetts, and a former New York Fed research director. “Europe is still struggling quite a lot, Japan seems to be up and down, and China’s having some growing pains at this point.”
A cooling global economy and declining inflation are posing risks to the outlook for the U.S., which saw growth accelerate in the second quarter to the fastest pace since 2011 and unemployment drop to a six-year low last month.
A number of officials said the five-year U.S. expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated,” minutes of the Sept. 16-17 FOMC meeting show. Fed Governor Daniel Tarullo said at an Oct. 11 event in Washington that he’s “worried about growth around the world.”
Market Volatility
The weakness, along with conflicts in Ukraine and the Mideast, sparked global market turbulence that sent the Standard & Poor’s 500 Index down as much 7.4 percent from its record close on Sept. 18, the day after the last Fed meeting. Ten-year Treaury notes touched the lowest since May 2013.
The S&P 500 has since rallied to recover most of its drop, resuming an advance that has seen the index almost triple since March 2009. The 10-year Treasury note yielded 2.3 percent late yesterday, below its 3.03 percent level at the end of last year. The divergence in major economies has also helped lift the dollar against its major peers, restraining inflation and push ing back expectations for the timing of the first Fed rate in crease. The Bloomberg Dollar Spot Index, which gauges the green back against 10 major currencies, has risen close to 6 percent since July 1.
Fed funds rate futures show the probability of a rate increase by the September 2015 FOMC meeting is about 42 percent, compared with 76 percent chance at the end of last month.
Balance Sheet
Even after purchases end, the Fed’s record balance sheet will provide support to the economy by limiting the supply of government securities and suppressing long-term interest rates. The FOMC has said it expects to stop reinvestments of maturing securities only after it raises the benchmark interest rate.
When the third round of large-scale asset purchases was announced, the jobless rate was 8.1 percent, and most policy makers forecast it would fall to 6 percent to 6.8 percent by late 2015. It’s now 5.9 percent. At the same time, weakness remains in some areas of the labor market, such as long-term unemployment.
While a 17 percent drop in oil prices this year has helped drive inflation farther below the Fed’s 2 percent target, it’s also giving consumers more to spend on other goods as gasoline prices fall to the lowest level in almost four years. U.S. chief executive officers see reasons for optimism. JPMorgan Chase & Co. CEO Jamie Dimon said last week that the world’s largest economy has “no real weak spot,” while Kenneth Jacobs, chief of investment bank Lazard Ltd., said on an earn ings call that “the U.S. economy continues to be resilient.”
source: Bloomberg
The greenback rose to a three-week high versus the yen, while emerging-market currencies declined, as traders pushed up odds for an interest-rate increase next year even as the Federal Open Market Committee maintained its pledge to keep borrowing costs low for a “considerable time.” Norway’s krone dropped as retail sales unexpectedly declined.
“The FOMC played up the strength of the labor market, and downplayed the extent to which lower inflation expectations were likely to impact long-term inflation and by extension policy,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG in New York, wrote in an e-mail. “The response has been a clear-cut stronger USD.” The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, climbed 0.6 percent to 1,069.40 as of 3:45 p.m. in New York, the biggest jump since Oct. 3. It earlier dropped 0.2 percent.
The greenback rose 0.7 percent to 108.89 yen and touched 108.95, the highest since Oct. 7. It rallied 0.7 percent to $1.2641 per euro after declining 0.7 percent in the previous three days. Japan’s currency climbed 0.1 percent to 137.64 per euro after reaching 138.03, the weakest since Oct. 1. The odds of borrowing costs going up by October 2015 climbed to 61 percent, from 51 percent before the Fed announcement, based on futures prices.
EM Selloff
The prospect of higher interest rates in the world’s biggest economy hurts the appeal of emerging-market assets, with an index with equal weightings of 20 major developing currencies dropping 0.2 percent after earlier gains.
Hungary’s forint slumped 0.9 percent to 244.64 per dollar, while South Africa’s rand declined 0.9 percent to 10.9389.
The Norwegian krone led losses among the dollar’s 31 major counterparts as retail sales shrank 0.1 percent in September from a 0.6 percent gain the previous month, data from Statistics Norway showed today. That compares with the median prediction of a 0.7 percent gain in a Bloomberg survey of economists. The jobless rate increased to 3.7 percent in August, from 3.4 percent the prior month, another report showed.
The krone slid 1.3 percent to 6.7007 versus the dollar and reached 6.7156, the weakest since June 2010. It depreciated 0.6 percent to 8.4711 per euro.
‘Job Gains’
“Labor-market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the FOMC said today in a statement in Washington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that “there remains significant underutilization of labor resources.”
The dollar index had been headed for its first monthly decline since June on concern slowing global growth and rising risks of disinflation will spill over into the U.S., prompting traders to push out their bets on the timing of the Fed’s rate increase. Policy makers have kept their key interest rate at zero to 0.25 percent since December 2008.
“The market had a little fit in the first half of October and pushed the fed-funds expectations, the first hike, out six months,” Greg Anderson, head of global foreign-exchange strategy in New York at Bank of Montreal, said by phone. “The Fed has just come back and said they’re looking at the fundamentals and gathered everybody back to June again.”
Dollar ‘Positive’
The U.S. economy will expand 2.2 percent this year and 3 percent in 2015, according to another Bloomberg survey. The euro area will grow 0.8 percent and 1.2 percent, while Japan’s economy will expand 1 percent in 2014 and 1.2 percent the following year, the surveys predict.
The U.S. may have added 225,000 jobs this month, at just about the average monthly gain this year of 227,000, according to a Bloomberg News survey of economists before the Nov. 7 Labor Department report. The unemployment rate is projected to be unchanged at 5.9 percent, the lowest level since July 2008.
“I can see a rate hike in the first half, based on the statement and the labor metrics,” Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a telephone interview. “The market absorbed the statement as being positive for the dollar.”
Swiss Franc Volatility Stirs as SNB Vote Raises Cap Risks
A referendum the Swiss National Bank says will impede its ability to conduct monetary policy is contributing to bets on greater price swings in the franc on concern its currency cap may be at risk. Two-month implied volatility on the euro-franc exchange rate is the highest since 2012 relative to a one-month gauge. That reflects a growing price premium for options linked to the currency for the period including the vote on the SNB’s assets. The referendum, which the SNB says would make it hard to fulfill its mandate, is due on Nov. 30.
If passed, the proposal would require the central bank to hold at least 20 percent of its assets in gold, among other measures. The SNB held foreign-exchange reserves of 462.2 billion francs ($488 billion) at the end of September with total assets of about 522 billion francs. The risk is that it would become more difficult for the central bank to defend its cap by amassing more foreign exchange. The SNB may also need to use its currency reserves to buy gold.
“Should this go through it’s going to have profound effects on the SNB’s ability to hold the floor,” said Peter Rosenstreich, the chief foreign-exchange analyst at Swissquote Bank SA in Gland, Switzerland. “Looking out at the volatility curve you’re starting to see people are pricing it in. Not tomorrow, but two or three months down the line, people are expecting something to happen.”
The franc has strengthened 1.8 percent against the euro this year as the European Central Bank lowered interest rates to records and started an unprecedented program of private asset purchases. That’s moving it closer to the 1.20 francs per euro cap imposed by the SNB to limit the currency’s appreciation. It was at 1.20594 francs per euro at 5:08 p.m. London time today.
Implied volatility on two-month options for euro-franc slipped to 3.53 percent today. While that’s above its 2.81 percent average for the year, it’s down from a record-high of 28.07 percent in August 2011. The one-month implied volatility declined to 2.54 percent. The premium for two-month options to buy the euro against the franc versus those allowing for sales dropped to 0.24 percentage points today, the least since Sept. 30, 25-delta risk reversals show.
The SNB set its currency limit in September 2011 after investors anxious about the euro-area debt crisis pushed the franc nearly to parity with the single currency. It hasn’t intervened to defend it since September 2012.
Fed Cites Improved Labor Market While Ending QE as Planned
The Federal Reserve said it sees further improvement in the labor market while confirming it will end an asset-purchase program that has added $1.66 trillion to its balance sheet.
“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the Federal Open Market Committee said today in a statement in Washington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that referred to “significant underutilization” of labor resources.
Policy makers maintained a pledge to keep interest rates low for a “considerable time.” While saying inflation in the near term will probably be held down by lower energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
Stocks extended losses after the Fed announcement. The Standard & Poor’s 500 Index fell 0.8 percent to 1,969.29 as of 2:17 p.m. in New York. The benchmark 10-year Treasury note yielded 2.35 percent, up 5 basis points from yesterday.
Chair Janet Yellen is completing two years of bond purchases that started under her predecessor, Ben S. Bernanke, as the Fed nears its goal for full employment. She must now chart a course toward the first interest-rate increase since 2006 while confronting risks from a slowing global economy and declining inflation. The FOMC repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since December 2008. Most Fed officials expect to raise the rate next year, according to projections released last month.
Reinvesting Proceeds
The Fed said it will continue reinvesting proceeds from a balance sheet that swelled to a record $4.48 trillion in the course of three rounds of so-called quantitative easing that started in November 2008 during the longest and deepest recession since the 1930s. The latest round was announced in September 2012, with monthly purchases of $85 billion in Treasuries and mortgage-backed securities. The Fed began a step-like reduction of purchases in January 2014, cutting them by $10 billion per meeting.
Minneapolis Fed President Narayana Kocherlakota dissented, saying that with low inflation expectations the Fed should commit to keeping rates low “at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset-purchase program at its current level.” As the Fed winds down unprecedented stimulus, the European Central Bank is contemplating its own quantitative easing program to tackle the weakest inflation in five years, and Japan is continuing purchases.
Bright Spot
“The U.S. is a big bright spot in the world,” said Stephen Cecchetti, professor of international economics at Brandeis International Business School in Waltham, Massachusetts, and a former New York Fed research director. “Europe is still struggling quite a lot, Japan seems to be up and down, and China’s having some growing pains at this point.”
A cooling global economy and declining inflation are posing risks to the outlook for the U.S., which saw growth accelerate in the second quarter to the fastest pace since 2011 and unemployment drop to a six-year low last month.
A number of officials said the five-year U.S. expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated,” minutes of the Sept. 16-17 FOMC meeting show. Fed Governor Daniel Tarullo said at an Oct. 11 event in Washington that he’s “worried about growth around the world.”
Market Volatility
The weakness, along with conflicts in Ukraine and the Mideast, sparked global market turbulence that sent the Standard & Poor’s 500 Index down as much 7.4 percent from its record close on Sept. 18, the day after the last Fed meeting. Ten-year Treaury notes touched the lowest since May 2013.
The S&P 500 has since rallied to recover most of its drop, resuming an advance that has seen the index almost triple since March 2009. The 10-year Treasury note yielded 2.3 percent late yesterday, below its 3.03 percent level at the end of last year. The divergence in major economies has also helped lift the dollar against its major peers, restraining inflation and push ing back expectations for the timing of the first Fed rate in crease. The Bloomberg Dollar Spot Index, which gauges the green back against 10 major currencies, has risen close to 6 percent since July 1.
Fed funds rate futures show the probability of a rate increase by the September 2015 FOMC meeting is about 42 percent, compared with 76 percent chance at the end of last month.
Balance Sheet
Even after purchases end, the Fed’s record balance sheet will provide support to the economy by limiting the supply of government securities and suppressing long-term interest rates. The FOMC has said it expects to stop reinvestments of maturing securities only after it raises the benchmark interest rate.
When the third round of large-scale asset purchases was announced, the jobless rate was 8.1 percent, and most policy makers forecast it would fall to 6 percent to 6.8 percent by late 2015. It’s now 5.9 percent. At the same time, weakness remains in some areas of the labor market, such as long-term unemployment.
While a 17 percent drop in oil prices this year has helped drive inflation farther below the Fed’s 2 percent target, it’s also giving consumers more to spend on other goods as gasoline prices fall to the lowest level in almost four years. U.S. chief executive officers see reasons for optimism. JPMorgan Chase & Co. CEO Jamie Dimon said last week that the world’s largest economy has “no real weak spot,” while Kenneth Jacobs, chief of investment bank Lazard Ltd., said on an earn ings call that “the U.S. economy continues to be resilient.”
source: Bloomberg