Dollar strengthens as emerging market selloff deepens

The dollar strengthened after the Federal Reserve scaled back its stimulus program of bond purchases that tend to weaken the greenback and emerging-market currencies extended declines.

Hungary's forint weakened, while South Africa's rand rose after slipping to a five-year low against the dollar. Demand for the kiwi [New Zealand Dollar] waned as New Zealand's central bank kept interest rates unchanged and a private report signalled a slowdown in Chinese manufacturing.

The euro fell for a fifth day as a market gauge of German inflation expectations dropped to the lowest level since May 2012. Russia's ruble snapped a five-day slide.

"Tapering came as expected and, interestingly, the Fed paid little heed on events in emerging markets," said Peter Kinsella, senior currency strategist at Commerzbank AG in London. "This means it will take a significant negative feedback loop from emerging markets to the US for the Fed to consider a change in policy. As for the euro, German CPI poses downside risks for the currency," he said, referring to the nation's consumer-price index.

The dollar strengthened 0.5% to $1.3593 per euro at 7.30am New York time. The US currency gained 0.1% to 102.41 yen, while the euro slipped 0.4% to 139.22 yen. The ruble was little changed at 40.9025 against Bank Rossii's target dollar-euro basket after sliding 1.1% on Wednesday.

The Fed said on Wednesday it will trim its monthly bond buying to $65-billion from $75-billion, sticking to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke's unprecedented easing policy.

Growth slows
Data on Thursday will show US gross domestic product expanded at a 3.2% annualised pace in the fourth quarter, while private consumption grew 3.7%, according to the median forecasts of economists surveyed by Bloomberg.

The rand slumped 2.5% against the dollar on Wednesday even after the South Africa Reserve Bank unexpectedly increased its benchmark interest rate, following central banks from Turkey to Brazil that have tightened monetary policy.

The rand appreciated 0.5% on Thursday to 11.2614 per dollar after falling 0.7% to 11.3909, the weakest since October 2008. "Measures taken by Turkey and South Africa don't solve the fundamental weakness such as the current-account balance and political instability," said Yuki Sakasai, a currency strategist at Barclays Plc in New York. "With the Fed continuing to taper and global liquidity gradually decreasing, emerging countries with structural problems will be pressured." 

Forint falls
The forint depreciated 0.8% to 311.73 per euro after dropping as much as 1.1%. The Hungarian currency has declined "too fast, too big" and the central bank is monitoring its move and the market environment, Gyula Pleschinger, a member of the central bank's Monetary Council, said on Wednesday.

The dollar's strength against the euro was driven partly by speculation that emerging-market central banks may take steps to prevent their exchange rates from falling further, according to Geoffrey Yu, senior currency strategist at UBS AG in London. "If these central banks are getting ready for intervention, they would need to over-fund in dollars," said Yu. "That may involve selling euro reserves into the UScurrency."

The euro declined as six German regions reported consumer prices fell this month from December. Germany's monthly inflation rate, calculated using a harmonised European Union method, dropped 0.6% in January after rising 0.5% last month, according to the median estimate of analysts in a Bloomberg survey before the Federal Statistics Office in Wiesbaden releases the data at 2pm local time. 

Yen gains
The yen has advanced 4.5% this year, the biggest gain in Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies.

The dollar gained 1.4% and the euro added 0.2%. Canada's dollar is the worst performer, falling 4.2%.

A Purchasing Managers Index by HSBC Holdings Plc and Markit Economics of China's manufacturing sector declined to 49.5 in January from 50.5 a month earlier, and compared to the 49.6 median forecast in a Bloomberg survey. A number below 50 indicates contraction.

China is the biggest trading partner of both Australia and New Zealand. The Reserve Bank of New Zealand kept its benchmark interest rate at a record-low 2.5% at a policy meeting on Thursday. Swaps trading prior to the decision had priced about an even chance of an increase. The kiwi dropped 0.5% to 81.70 US cents and fell 0.3% to 83.74 yen.

The RBNZ decision is "a slight disappointment," said Imre Speizer, a market strategist at Westpac Banking Corporation in Auckland. "We expect the market to sell off the kiwi on a no- change decision but we don't expect it to run away too much further as the market will start focusing on the March hike." – Bloomberg

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