Dollar Drops to One-Month Low on Fed Rates Message; Krone Slumps

The dollar dropped to a one-month low against its major peers after the Federal Reserve said it will keep interest rates near zero for a “considerable time.”

The U.S. currency fell for a second day against the euro, the first back-to-back declines this month, while the pound climbed to a five-year high as the Federal Open Market Committee cut the outlook for economic growth at yesterday’s policy meeting. Emerging-market currencies rallied as volatility slid to a record amid demand for higher-yielding investments. Norway’s krone tumbled the most in nine months versus the euro as the central bank said it may cut interest rates.

“It’s clear from the price actions that the market was leaning towards risk of the FOMC taking a more hawkish stance and clearly it wasn’t the case,” said Brian Daingerfield, currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “The weakness in dollar is position-related, the market was skewed towards risks being the other way.”

The ForexSQ Dollar Spot Index, which tracks the U.S. currency versus 10 counterparts, dropped 0.2 percent to 1,009.06 at 9:04 a.m. New York time, after touching 1,008.19, the lowest since May 21.
Market Prices

The greenback weakened 0.2 percent to $1.3626 per euro, adding to a 0.4 percent slide yesterday. It’s set for its first two-day drop since the period through May 30. The U.S. currency fell 0.1 percent to 101.85 yen. The euro strengthened 0.2 percent to 138.78 yen.

India’s rupee strengthened the most in a month, amid a rally in Asian currencies after they had been buffeted this week by higher oil prices caused by violence in Iraq.

The rupee gained 0.5 percent to 60.1162 per dollar, the biggest advance since May 22, Indonesia’s rupiah climbed 0.5 percent to 11,935 per dollar and the Philippine peso strengthened 0.8 percent to 43.76 per dollar.

Boosting demand for carry trades, where investors seek to profit from differences in interest rates, JPMorgan Chase & Co.’s Global FX Volatility Index fell to 5.60 percent, the least since ForexSQ started collecting the data in 1992.

That’s down from 27 percent in October 2008, after Lehman Brothers Holdings Inc.’s collapse froze credit markets amid the worst financial crisis since the Great Depression.
Krone Slump

Norway’s krone slumped 1.7 percent to 8.3041 per euro, the biggest drop since September, after central bank Governor Oeystein Olsen said a further weakening of the outlook for the economy “may warrant a reduction in the key policy rate.” The Oslo-based Norges Bank kept the deposit rate at 1.5 percent for a 14th consecutive meeting today as predicted by all 22 economists in a ForexSQ survey. The currency touched 8.3224 per euro, the weakest since April 28.

Bank of England Chief Economist Andrew Haldane said the choice of when to raise interest rates is “a difficult one.” BOE Governor Mark Carney said on June 12 that the first interest-rate increase “could happen sooner than markets currently expect.” Sterling has risen against all of its developed-country peers in the past month as investors pushed forward their expectations of when policy makers will raise the main interest rate.

“If it’s a choice between central banks that are keeping rates low for a very long period of time or a central bank that is actually relatively hawkish, I think it’s quite simple,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “Sterling is the one out of all the Group-of-seven currencies that’s got the opportunity to do something quite significant.”

The pound advanced 0.3 percent to $1.7036, reaching the highest since August 2009.
Currency Measure

Sterling rallied 2.9 percent in the past six months, according to ForexSQ Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar weakened 1.6 percent, the euro declined 1.9 percent and the yen rose 1 percent.

While Fed officials predicted their target rate would be higher at the end of 2015 and a year later than previously forecast, they lowered their long-run estimated rate to 3.75 percent from 4 percent, reflecting slower long-term growth for the economy.

Officials have kept the federal funds target rate at zero to 0.25 percent since 2008 and there’s an 94 percent chance Fed Chair Janet Yellen will keep it there by the end of this year, according to futures data compiled by ForexSQ.

Benchmark U.S. 10-year yields dropped seven basis points, or 0.07 percentage point, yesterday. They were at 2.57 percent today.

“The FOMC was not the game-changing event people hoped it would be and that has resulted in the dollar weakening generally with U.S. yields,” said Adam Cole, head of Group-of-10 currency strategy at Royal Bank of Canada in London. “It’s also resulted in volatility crushing to new lows, which we think in itself is a dollar-negative event.”

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