Dollar Index Reaches 2-Week High as Fed View Boosts U.S. Yields

The Dollar Index rose to a two-week high as the yield differential between U.S. and Japanese government securities increased to the widest in almost two years, increasing the appeal of dollar-denominated assets.

The U.S. currency rose against all but one of its 16 major counterparts before U.S. reports tomorrow that economists said will show durable-goods orders gained and house pricesincreased as the Federal Reserve may reduce monetary stimulus. A gauge of currency volatility climbed to the highest since June 2012. Chinese stocks fell the most in four years, damping investor interest in riskier currencies. The Swedish krona slid to a seven-month low versus the dollar.

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Stacks of U.S. $100 bills are arranged for a photograph in New York, U.S. Photographer: Scott Eells/Bloomberg

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June 20 (Bloomberg) -- Ford Motor Co. Chief Executive Officer Alan Mulally talks about Japan's currency policy, the automaker's production in Asia and growth strategy in China. He speaks with Bloomberg's Stephen Engle in Nanchang, China. (Source: Bloomberg)

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June 19 (Bloomberg) -- Mitul Kotecha, the global head of foreign-exchange strategy at Credit Agricole SA in Hong Kong, talks about Japan's currency, government and central bank policies. Kotecha also discusses the prospects for Federal Reserve policy and emerging-market currencies. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg)

“Long-term yields in the U.S. have continued to jump higher over the last week,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “That’s driving some inflows and strength into the U.S. dollar. There’s been a reassessment of the whole liquidity story and what will be the impact on rates across the board.”

The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the U.S. currency against those of six trading partners, rose 0.3 percent to 82.531 at 8:57 a.m. in New York after climbing to the highest level since June 5.

Currency Levels

The dollar advanced 0.2 percent to $1.3101 per euro after appreciating to the strongest level since June 6. The U.S. currency weakened 0.4 percent to at 97.50 yen. The yen added 0.5 percent to 127.77 per euro.

JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency option premiums, rose to as high as 11.83 percent today, the most since June 1, 2012. The gauge has averaged 8.76 percent in the past year.

Sweden’s krona declined versus all 16 of its major peers as the CSI 300 Index of Chinese stocks fell the most in four years, signaling a bear market. The currency dropped 1.3 percent to 6.7550 per dollar after depreciating to the least since Nov. 21. It has tumbled 4.4 percent in the past week.

The Norwegian krone fell against the majority of its most-traded counterparts, slipping as much as 1.6 percent to 6.1539, the lowest since July 17.

Treasury Yields

Treasuries due in two years yielded 0.28 percentage point more than similar maturity Japanese sovereign debt, the biggest premium since July 2011, according to Bloomberg data.

“The fundamental picture for the dollar is clearly positive,” said Marcus Hettinger, a currency strategist at Credit Suisse Group AG in Zurich. “The expectation that the Federal Reserve may start reducing asset purchases leads to higher U.S. yields supporting the dollar.”

The Dollar Index jumped 1 percent on June 19 when Chairman Ben S. Bernanke said policy makers may begin reducing their quantitative-easing program this year and end it in mid-2014 if the economy is achieving the central bank’s objectives. The Fed purchases $85 billion of bonds each month.

Fed Bank of Dallas President Richard Fisher, one of the most vocal critics of the central bank’s quantitative easing, is due to talk about U.S. monetary policy and the economy today in London. This week will also see speeches from Bank of Atlanta President Dennis Lockhart, Bank of Richmond President Jeffrey Lacker, Bank of Cleveland President Sandra Pianalto and Bank of San Francisco President John Williams.

U.S. durable-goods orders increased 3 percent in May after rising a revised 3.5 percent the previous month, according to a Bloomberg News survey before tomorrow’s Commerce Department report. The S&P/Case-Shiller index of home values for 20 cities climbed 10.6 percent for the year ended April after a 10.9 percent gain in March that was the biggest since 2006, a separate survey showed.

How Does Forex Trading Work

Forex trading is typically done through a broker or market maker. As a forex trader  you can choose a currency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.
forex trades can be placed through a broker or market maker. orders can be placed with just a few clicks and the broker then passes the order along to a partner in the interbank market  to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

Yen Misses Out on Flows to Risk-Off Currencies

EUROPEAN SESSION UPDATE: Euro fails to react to a better than expected German business climate survey; PM Abe said the Japanese economy has benefitted from Forex movements…

We seem to be watching another risk-off session in today’s Forex trading, as the Franc and US Dollar are showing the biggest wins, and the three commodity currencies, CAD, NZD, and AUD, are showing the biggest losses. Equities have traded lower in both the European and Asian markets, and US futures are also pointing downwards.

However, the Yen does not seem to be showing any significant gains in today’s risk-off trading, possibly explained by a widespread rise in 10-year bond yields from many different countries, with the exception of Japanese government bonds.

There was little data in today’s European session, and a better than expected rise in the German IFO business climate survey failed to move the Euro significantly higher. Meanwhile, the Swiss 10-year bond yield rose above 1.00% for the first time since October 2011.

In Asia, Japan PM Abe further broke a taboo for Japanese officials to discuss Yen levels, as the leader said Forex movements until now have been positive for the economy. In China, further worries over a lack of liquidity and a Goldman Sachs downgrade of its Chinese growth forecast sent the Shanghai Composite index 5.30% lower and below 2000 for the first time since December.

The US Dollar is currently trading slightly below 98.00 against the Yen, and USD/JPY may again see support around 96.50. The pair may see further resistance by the 99.00 figure.

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There is a new sense of energy in the FX markets today but the rally has been contained to only a few major currency pairs. The biggest gains are being enjoyed by USD/JPY and USD/CHF but AUD/USD and NZD/USD also recovered nicely. Euro and sterling on the other hand are struggling to gain any type of momentum – upside or downside as the lack of market moving Eurozone data keep movements in these currencies limited.
At a time when the rest of the world economies are on shaky ground, U.S. economic data continues to surprise to the upside, making the dollar extremely attractive to global investors. Consumer confidence surged to its highest level in 5 years. Thanks to the improvement in the labor market and the persistent rise in stocks, the Conference Board’s measure of consumer sentiment rose to 76.2 in May, up from 69. Greater consumer optimism should hopefully translate into stronger consumer spending in the second quarter. The Richmond Fed manufacturing index also rebounded to -2 from -6. While this was the second month in a row that manufacturing activity contracted, the improvements is a breath of fresh air for the sector. Finally, house prices increased 1.12% in March after rising 1.32% in February. This represents deterioration but for the first quarter, house prices are up 10.17% vs. 7.25% in Q4. As U.S. economic data continues to improve, expectations for tapering asset purchases by the Fed will continue to build and this sentiment should fuel further gains in the dollar.
Meanwhile, the IMF’s report on central bank purchases of gold is getting some attention this morning and even though gold is lower, it is lending support to the beleaguered AUD and NZD. Investors have been eager to see whether the 18% decline in gold prices year to date attracted central bank buying and according to the International Monetary Fund, aside from Canada and Mexico, every major central bank has been hunting for bargains. Russia, Kazakhstan and Azerbajian collectively increased their gold holdings by 75%, cementing Russia’s status as the world’s number one buyer of gold. These 3 former Soviet Republics have been buying all the way down and while their demand has limited the slide in gold, it has not stopped it.
For most central banks, buying gold is part of their overall forex portfolio diversification strategy and the further gold declines, the more demand we expect because central banks are not as sensitive to short or medium term swings as traders or even investors. The outlook for gold hinges on the outlook for the U.S. dollar and for the time being, expectations for a reduction in asset purchases by the Fed should keep the dollar bid. According to the CFTC’s latest positioning data, fund managers and speculators are grossly short gold and we believe that the prices could head lower.

U.S. Stocks Tumble as S&P 500 Extends Monthly Decline

U.S. stocks retreated, sending the Standard & Poor’s 500 Index to a nine-week low, as Chinese equities entered a bear market amid concern a cash crunch will hurt the world’s second-largest economy and speculation increased that the U.S. will begin curbing stimulus.

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Traders work on the floor at the New York Stock Exchange on June 21, 2013. Photographer: Timothy Clary/AFP via Getty Images

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The S&P 500 sank 2.1 percent last week, the most since April 19, after the Federal Reserve said it may start paring stimulus measures as soon as September if the economy improves in line with its forecasts. Photographer: Jin Lee/Bloomberg

Bank of America Corp. and Citigroup Inc. slid more than 2.8 percent as banks tumbled. Barrick Gold Corp. led gold producers lower as the precious metal traded near a 2 1/2-year low. Deere & Co. lost 3.2 percent as JPMorgan Chase & Co. recommended selling the shares. Vanguard Health Systems Inc. surged 67 percent after agreeing to be bought by Tenet Healthcare Corp. for about $1.8 billion.

The S&P 500 (SPX) fell 1.7 percent to 1,565.07 at 10:01 a.m. inNew York, the lowest level on a closing basis since April 22. The Dow Jones Industrial Average slipped 239.03 points, or 1.6 percent, to 14,560.37. Trading in S&P 500 stocks was 33 percent above the 30-day average during this time of day.

“Investors have been shaken by the concept of rising interest rates and a reduction in stimulus from the Federal Reserve, coupled with the uncertainty regarding effectively how robust the Chinese central banking system is,” Ethan Anderson, senior portfolio manager for Rehmann Financial in Grand Rapids, Michigan, said by phone. His firm manages about $1.5 billion. “We found ourselves in a headline-dependent environment, which is difficult for investors to function.”

The CSI 300 Index (SHSZ300) of China’s biggest companies tumbled 6.3 percent, the most since August 2009 and taking its decline from this year’s peak to more than 20 percent. China’s central bank said there’s a reasonable amount of liquidity in the financial system and urged banks to control risks from credit expansion, signaling no relief from a cash squeeze.

China Rates

China’s benchmark money-market rates last week climbed to a record as the central bank refrained from using open-market operations to ease the cash crunch. The rates still fell for a second day today.

The S&P 500 (SPX) sank 2.1 percent last week, the most since April 19, after the Federal Reserve said it may start paring stimulus measures as soon as September if the economy improves in line with its forecasts.

The benchmark index is down 3.9 percent in June, on course for the biggest monthly drop since May 2012. The gauge has declined 6.2 percent since its May 21 high amid speculation the Fed will scale back quantitative easing that helped fuel a rally in stocks worldwide. The index has stillrallied 132 percent from its March 2009 low.

‘Great Performance’

“We’ve had this great performance in stocks without great economic growth,” Larry Kantor, the New York-based head of research at Barclays Plc, told Anna Edwards on Bloomberg Television. “Those days are over. I suspect over the next couple of months U.S. growth is going to be a little weaker than people are anticipating.”

Treasuries slumped today, pushing the 10-year yield as high as 2.66 percent, a level not seen since August 2011, before data this week that may add to the case for the Fed to slow bond purchases. Reports tomorrow may show U.S. durable-goods orders rose and house pricescontinued to recover, according to Bloomberg surveys of economists.

While U.S. equity volatility reached a six-month high last week, expected stock swings are less than half as much as peaks in the last four years and traders are pricing in little increase for the rest of the year.

Volatility Index

The Chicago Board Options Exchange Volatility Index (VIX) jumped 10 percent to 18.9 for the week. Even after the gauge of options prices on the S&P 500 increased 67 percent since March, it would have to rise 134 percent more to reach its average high of 44 from 2009 to 2012, according to data compiled by Bloomberg. VIX futures expiring in six months trade only 10 percent higher than the index. The gauge jumped 13 percent to 21.45 today.

Financial shares tumbled. Bank of America dropped 3.2 percent to $12.29. Citigroup slipped 2.8 percent to $45.56.

Barrick Gold declined 4.9 percent to $16.06. The precious metal dropped to the lowest since September 2010.

Deere lost 3.2 percent to $79.82 as JPMorgan cut its rating on the world’s largest agricultural-equipment maker to underweight, similar to a sell recommendation, from neutral. Lower crop prices and higher land rent costs may drive profit-per-acre lower, analysts led by Ann Duignanwrote.

Allergan (AGN) Inc. slipped 8.1 percent to $85.15. Deutsche Bank AG downgraded the maker of the Botox wrinkle treatment to hold from buy and Leerink Swann LLC trimmed its recommendation to market perform from outperform.

Vanguard Health Systems jumped 67 percent to $20.61. Tenet will pay $21 a share in cash for the Nashville, Tennessee-based hospital operator and will assume $2.5 billion of Vanguard debt, the companies said in a joint statement