Dollar drops and pound gains amid bets that Fed won’t slow stimulus

Investors worry that that debt-debate will put of Fed changes to its currency-debasing stimulus program

Topics: Bloomberg, dollar, English pound, Economic Stimulus, Debt limit, , , ,

ct. 17 (Bloomberg) — The dollar fell the most in a month versus the euro on bets disruption from the U.S. debt-ceiling debate will hamper growth and prompt the Federal Reserve to postpone tapering its currency-debasing stimulus program.

The greenback weakened against most major peers after BlackRock Inc. and Pacific Investment Management Co. said the Fed will maintain its bond-buying. A 16-day government shutdown ended after Congress approved a deal yesterday extending funding and debt-limit deadlines into next year. The pound climbed after U.K. retail sales rose more than economists forecast.

“A few months ago, it was a no-brainer that the dollar was going to go up because of tapering — the dynamics have changed quite dramatically,” Simon Smith, chief economist at FxPro Group Ltd. in London, said in a phone interview. “It wasn’t a good deal for the dollar. Obviously the uncertainties of the debt ceiling and government shutdown are only delayed. It’s going to be dollar-negative in the next three months.”

The dollar sank 0.9 percent to $1.3661 per euro at 9:37 a.m. New York time, the biggest loss since Sept. 18. It reached $1.3668, the weakest level since Feb. 1. The U.S. currency slid 0.9 percent to 97.85 yen after rising earlier to 99.01, the strongest since Sept. 27, and it weakened 1.2 percent to 90.28 Swiss centimes. The euro was little changed at 133.72 yen.

POUND RALLIES

Sterling rallied the most in a month against the dollar after the U.K. Office for National Statistics said retail sales including fuel increased 0.6 percent from August, when they declined 0.8 percent. The median forecast of 21 economists in a Bloomberg survey was for a 0.4 percent gain.

“There’s a lot of bullish sentiment toward the pound,” said Kathleen Brooks, European research director at Forex.com in London. “It’s being driven by a weak tone in the dollar combined with the U.K. data.”

The pound rose as much as 1.2 percent, the biggest intraday gain since Sept. 18, to $1.6143 before trading at $1.6138.

The yen and the Swiss franc gained against most major peers as China’s Dagong Global Credit Rating downgraded the American government’s debt, spurring demand for safer assets.

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The shutdown shows the deterioration of the U.S. government’s solvency, Dagong said in a statement. The company downgraded the local- and foreign-currency credit ratings of the U.S. to A- from A. It also maintained a negative outlook.

‘NOT REPRESENTATIVE’

“We suspect that the U.S. credit downgrade by China’s Dagong was merely an excuse for dollar selling,” analysts at Brown Brothers Harriman & Co., including Global Head of Currency Strategy Marc Chandler in New York, wrote in a research note. “Dagong’s move is not representative of how U.S. Treasuries are perceived. Yet it plays on fears that the U.S. drama will accelerate the diversification out of dollars.”

President Barack Obama signed into law the measure to fund the government through Jan. 15, 2014, and extend U.S. borrowing authority until Feb. 7, setting up another round of confrontations. The accord was reached a day after Fitch Ratings said it may cut the U.S. AAA credit grade, citing the inability to raise the $16.7 trillion debt ceiling in a timely manner.

“The market is getting grumpy with the dollar,” David Bloom, head of global currency strategy at HSBC Holdings Plc in London, said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua and Guy Johnson. “It is going through the throes of thinking, can the Fed taper this year? It’s starting to look less likely.”

The Fed buys $85 billion of bonds a month to put pressure on long-term borrowing rates and spur growth. Policy makers unexpectedly refrained from reducing the purchases last month, saying they wanted more evidence of an economic recovery.

SLOWER TAPERING

“Because of the disruption, because of the uncertainty, what’s likely to happen is a slower pace of tapering by the Fed,” said Russ Koesterich, the chief investment strategist at BlackRock Inc., the world’s largest money manager with $4.1 trillion in assets as of Sept. 30. Falling consumer confidence will depress gross domestic product growth in the fourth quarter, New York-based Koesterich said on Bloomberg Television’s “First Up” with Susan Li.

The Fed Bank of Philadelphia’s general economic index fell to 15 in October from 22.3 the previous month, according to a Bloomberg News survey before the report today. Readings above zero signal growth. The Empire State index for the New York region dropped to a five-month low of 1.5 in October, a report showed Oct. 15.

The dollar dropped 1.5 percent in the past month, according to Bloomberg Correlation Weighted Indexes, which track 10 developed-country currencies. The euro gained 1 percent, and the yen was little changed.

WON RISES

South Korea’s won advanced to a nine-month high versus the dollar, even as an official said the government is watching price moves closely.

The finance ministry is watching for “herd behavior” and an increase in volatility, Kim Seong Wook, a director at the ministry’s Foreign Exchange Market Division said by phone.

The won gained 0.2 percent to close at 1,063.58 per dollar in Seoul after reaching 1,063.10, the strongest since Jan. 23.

–Editors: Greg Storey, Kenneth Pringle

To contact the reporters on this story: Andrea Wong in New York at awong268@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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