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Dollar Tumbles After Fed Minutes, Slower Manufacturing Growth

Dollar Tumbles After Fed Minutes, Slower Manufacturing Growth

Jan. 3 (Bloomberg) -- The dollar fell the most in 17 months against the euro after the Federal Reserve said the number of additional interest rate increases ``probably won't be large'' and U.S. manufacturing growth slowed.

The U.S. central bank is nearing the end of its rate increases just as economic growth in Europe is picking up, bolstering speculation the European Central Bank will lift its benchmark rate. Higher European rates would stem the yield advantage for U.S. assets that spurred the dollar's 2005 rally, its first gain in four years against the euro and yen.

``The minutes have fueled the fire for the dollar bears,'' said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products Corp. in Wilton, Connecticut.

Against the euro, the dollar fell 1.7 percent, the biggest drop since August 2004, to $1.2030 at 3:19 p.m. in New York from $1.1820 late yesterday. The U.S. currency also declined 1.5 percent, the most since Dec. 14, to 116.11 yen from 117.88.

The Fed released minutes of its Dec. 13 meeting, when central bankers tempered prospects for future interest-rate increases by saying that only ``some further measured policy firming'' may be needed. Investors since then have kept bets on an increase at the Fed's Jan. 31 meeting and remained split about the following meeting.

Manufacturing Pace

The euro also was bolstered by reports earlier today showing an acceleration in European manufacturing and the biggest decline in German unemployment in 15 years. The figures added to speculation the European Central Bank will raise rates while the Federal Reserve may be closer to ending its increases.

``We've had a positive Euroland manufacturing report and a lackluster U.S. manufacturing report,'' said Greg Anderson, a foreign-exchange strategist at ABN Amro Bank NV in Chicago. ``That sets a poor tone for the dollar.''

Lehman Brothers Holdings Inc. advised exiting bets the dollar will rise versus the euro following the U.S. manufacturing report and after two-year Treasury note yields rose above 10-year yields last week. A so-called inverted yield curve preceded the last four U.S. economic recessions.

Shorting the Dollar

``Traders are returning to the market and they are taking the opportunity to re-initiate short dollar positions,'' or bets on its decline, said Kathy Lien, chief currency strategist in New York at Forex Capital Markets LLC. ``Last week was the yield curve inversion. Typically it has been an indicator of a recession, so the market is interpreting this as a sign the Fed could pause sooner than expected.''

The Institute for Supply Management, a private industry group, said its factory index declined to 54.2 from 58.1 in November. Economists expected an index of 57.5, according to the median of 53 forecasts in a Bloomberg survey. A reading above 50 indicates expansion.

An index of manufacturing in the euro region rose to 53.6 this month, from 52.8 in November, said NTC Research Ltd., which compiled the measure based on a survey of about 3,000 purchasing managers for Royal Bank of Scotland Group Plc.

At the Dec. 13 meeting the Fed stopped saying in its prepared statement that rates were at a level that would stimulate growth, a sign the Fed is nearer to a change in policy. The dollar fell the most in six years against the yen that week. It fell the most since early September versus the euro.

Rate Legacy

Still, the Fed has lifted its benchmark overnight lending rate 13 straight times since June 2004, to 4.25 percent last month, while the ECB raised its benchmark for the first time in five years last month, to 2.25 percent, and the Bank of Japan kept rates near zero percent since 2001.

Last year the dollar appreciated more than 14 percent against both the euro and yen.

Sixty-one percent of 46 traders, strategists and investors surveyed Dec. 29 and Dec. 30 from Sydney to New York advised buying the dollar against the yen this week. About 52 percent recommended purchasing the U.S. currency versus the euro.

Interest-rate futures show expectations the ECB will raise rates at least twice in 2006. In the U.S., at least one increase is priced in for January and futures show a better than 50 percent chance of a second.

To contact the reporter on this story:
Michael McDonald in New York at [e-mail];
Joshua Krongold in New York at at [e-mail].


LINK: http://quote.bloomberg.com/apps/news?pid=10000006&sid=aJi7Q3bKdJj8&refer=home