August 16, 2013 / 7:58 PM / 6 years ago

FOREX-Dollar rallies, reversing course, but doubts remain

* Investors debate impact of rising U.S. yields
    * Expectation of Fed tapering spurs dollar bids and offers
    * ECB's monetary policy seen remaining accommodative


    NEW YORK, Aug 16 (Reuters) - The dollar reversed course
during New York trading on Friday to rise against the euro and
yen after a report showed U.S. consumers were less optimistic,
prompting a rise in risk aversion.
    The report indicated consumers, the backbone of the U.S.
economy, were bracing for higher interest rates and slightly
slower economic growth. 
    But that was just one undercurrent among many as investors
continued to adjust positions amid a rise in U.S. Treasury
yields on expectations the Federal Reserve may start withdrawing
monetary stimulus as soon as next month.
    While a cutback in stimulus is not a rise in official
interest rates, investors are acting as if the rise in Treasury
market yields is the equivalent. Higher U.S. yields would
typically raise the attractiveness of dollar-denominated assets
and boost the dollar. 
    Quantitative easing, or bond purchases by the Fed for its
own balance sheet, was uncharted territory until the central
bank launched the operation in a major policy shift to try to
help stabilize the economy. Now, investors are concerned that
rising yields may lead to a broader sell-off in U.S. assets.
    "Without the U.S. consumer behind growth, the U.S. will
struggle to have a stronger economy," said Michael Woolfolk,
global market strategist at BNY Mellon in New York. "It's risk
off." 
    The dollar index rose 0.13 percent to 81.281. The
euro was 0.12 percent lower on the day at $1.3332 after
earlier touching a one-week high, while against the yen, the
dollar was 0.22 percent higher at 97.57. The dollar swung
between a peak of 97.77 yen and a trough of 97.03 yen. 
    U.S. housing starts and permits for future home construction
rose less than expected in July, suggesting higher mortgage
rates could be slowing the housing market's momentum.  
    Investors were still digesting Thursday's Treasury
Department data that showed China and Japan led an exodus from
U.S. Treasuries in June after the first signals the U.S. central
bank was preparing to wind back its stimulus. [ID:nL2N0GG0LC}
    The sales were part of $66.9 billion of net sales by
foreigners of long-term U.S. securities in June, a fifth
straight month of outflows and the largest since August 2007,
U.S. Treasury Department data showed.
    "Yesterday's data spooked investors into concern about a
wholesale abandonment of U.S. assets," said Omer Esiner, chief
market analyst at Commonwealth Foreign Exchange in Washington.
"If Treasury prices continue to fall, potential tapering may not
be as broadly positive for the dollar as first thought.
    "Ultimately, rising bond yields will support the dollar, but
not against such a big change in the backdrop." 
    Ten-year Treasury yields traded at a two-year
peak of 2.866 percent, while the gap between two-year Treasury
yields and their Japanese counterpart rose
to the highest in six weeks, Reuters data showed.
    Part of the reason for yen bids volatility was positioning
ahead of the weekend. 
    Japanese investors were missing the action this week due to
the Obon holiday, but should be returning late Sunday New York
time.
    Some of the strength in the dollar/yen in New York trade on
Friday was buying ahead of that influx of investors. Just $1.94
billion in yen changed hands on Reuters Dealing Friday.  
    The Bank of Japan embarked on a massive quantitative easing
program in April, and with more fiscal and structural reforms
likely to be put in place in coming months, more Japanese
investors are looking overseas for higher yields.
    Still, amid the gyrations, most managers are looking for
longer term dollar strength. 
    In the United States, reasonably sturdy domestic data has
bolstered expectations that monetary policy may not remain
ultra-loose for long. 
    "We remain constructive of the dollar and expect the Fed to
start tapering in the near term," said Kenneth Dickson,
investment director at Standard Life Investments in Edinburgh,
which has $271 billion of assets under management.
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