FOREX-Dollar slides to 7-week low vs euro before Fed minutes

Wed Feb 19, 2014 11:32am EST

Related Topics

* Weak U.S. data stokes uncertainty on Fed policy

* Fed meeting minutes due later Wednesday

* Dollar hits session low against yen

By Sam Forgione

NEW YORK, Feb 19 (Reuters) - The dollar hit a seven-week low against the euro on Wednesday and its lowest this year versus a basket of currencies, weighed down by soft U.S. housing numbers ahead of the release of minutes from the Federal Reserve's latest policy meeting.

The euro rose as high as $1.3773, its strongest level since Jan. 2. The dollar later gained some ground, leaving the euro last trading flat on the day at $1.3763, with equity markets offering investors little direction.

Tuesday's New York manufacturing and U.S. housing data were the latest numbers out of the United States to disappoint investors, increasing pressure on the dollar.

On Wednesday, Commerce Department data showed U.S. housing starts recorded their biggest drop in almost three years in January.

The numbers bolstered the case for the Fed to be patient in reducing its huge bond-buying program, ahead of the minutes from the January policy meeting when the Fed opted to trim asset buying by another $10 billion per month.

Against a basket of major currencies, the dollar index fell as low as 79.927, its lowest this year. It was last to 80.043, little changed from late on Tuesday.

"We've had nothing but negative economic surprises and the excuse that it is all weather-related is going to terminate very soon," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York.

"If this reflects a more secular weakness, the Fed could take a more dovish bent in the near term," he said.

Nevertheless, most strategists still expect the Fed to keep tapering, barring a major economic shock, although some think quantitative easing could continue into next year, driven by the need to keep economic growth going.

"Our economists expect today's FOMC minutes to ... (say) that the tapering process remains on track and is unlikely to be interrupted barring a significant shock to the economic outlook," said Adam Cole, head of G10 FX strategy at RBC Capital, in a note.

"In other words, a $10 billion reduction per meeting should be everyone's base case."

The dollar also hit a session low against the yen of 101.83 before paring losses and is currently down 0.1 percent at 102.24 yen.

Yields on benchmark 10-year notes slipped to 2.69 percent form 2.71 percent the previous session.

The low yields are pressuring the dollar and keeping the currency from gaining against the yen, said BK's Schlossberg.

"Until you see higher U.S. yields, you're going to continue to see the dollar weaken against the yen," he said.

EQUITY FLOW GAP

Meanwhile, Treasury figures showed overseas investors had sold almost $120 billion of U.S. assets in December.

Alan Ruskin, global head of G10 currency strategy at Deutsche Bank in New York, noted that the net outflow from U.S. equities over 2013 has amounted to a huge $214 billion.

In contrast, the euro zone attracted inflows into stocks of 111 billion euros. At the same time, the euro zone enjoyed a record current account surplus of 216 billion euros while the United States ran up a deficit of almost $400 billion.

"That the euro was the strongest major currency in 2013 is easily - with all the benefit of hindsight - explained by this current account and equity flow gap," Ruskin said.

"For dollar strength to broaden and also encompass the euro, a turn in the 'equity gap' is one precondition."

The yen, meanwhile, rebounded from Tuesday's falls, which were prompted by the Bank of Japan's decision to extend and expand a scheme to promote bank lending.

Betting on dollar-yen was one of the biggest hedge fund trades for the start of 2014, and with the dollar having finished last year at 105.275 yen the trade is now showing sizeable losses.

The euro was also down 0.1 percent at 140.72 yen.

FILED UNDER: