Dollar stands tall in Asia
The US dollar rose broadly on Thursday as global asset markets underwent sharp adjustments in the wake of confirmation by the Federal Reserve that it would begin to dial down stimulus this year as the economic outlook improves. The Australian dollar and emerging Asian currencies slumped as traders speculated that higher US bond yields down the road would prompt investors to shift some of their funds back to the United States from high-yielding currencies.
Copyright Reuters, 2013
The US dollar also held firm against the yen, breaking away from the pattern in the past few weeks in which the greenback often fell in tandem with Tokyo share prices. "Some people had hoped that Bernanke might strike a dovish tone given nervous market sentiment of late, so it was a bit of a surprise," said Koichi Takamatsu, executive director of FX trading at Nomura Securities.
The dollar index, which tracks the greenback's performance against a basket of major currencies, rose 0.3 percent to 81.627, its highest level since June 11. Against the yen, the dollar gained 0.6 percent to 97.04 yen, touching a one-week high of 97.185 yen briefly despite falls in US and global shares after the Fed's policy meeting. The euro also swiftly retreated from a four-month high around $1.3418 to last stand at $1.3272, down about 0.3 percent on Thursday following an 0.8 percent fall on Wednesday.
Fed Chairman Ben Bernanke said that tapering of its bond buying depends on economic data and that a decline in US unemployment to 6.5 percent is a threshold, rather than a trigger, for rate hikes. Nonetheless, market players tried to look beyond, as US bond yields rose sharply.
"About two years from now, the Fed is going to raise rates. At the end of the day, currencies with low funding costs are likely to be sold. This may lead to a shift from dollar-carried trade to yen-carried trade," said a trader at a Japanese bank. Bernanke's comments sent US stocks and bond prices sharply lower, pushing benchmark Treasury yields to a 15-month high. The 10-year yield jumped to 2.380 percent, approaching its March 2012 peak of 2.399 percent and the October 2011 high of 2.420 percent.
The Fed's statements put it ahead of the world's other big central banks in signalling a reduction of its stimulus. The Bank of Japan is just two months into its two-year stimulus while a sluggish euro zone economy is seen as keeping the European Central Bank's easy policy bias.
Analysts expect global markets, which have been bouyed by the Fed's easy money policies, will continue to adjust to the prospect of the US economy standing on its own strength. High-yielding currencies were among the hardest hit on Thursday, with the Australian dollar slumping to a fresh 33-month trough of $0.9232. On Wednesday, it fell 2.1 percent, its biggest daily drop in a year and a half. The Australian dollar also hit its lowest level in almost three years against the euro, which rose to as high as A$1.4357.
"A move towards the end of quantitative easing in the US will further reverse the upward pressure seen on the Australian dollar since 2009," said Shane Oliver, head of investment strategy at AMP Capital. Asian currencies also dropped sharply, with the Korean won, the Thai baht, Malaysian ringgit and the Philippine peso all falling more than 1 percent. The Aussie and Asian currencies had to contend with additional woes as the flash HSBC Purchasing Managers' Index showed activity in China's vast manufacturing sector weakened further in June to a 9-month low as new orders faltered.