The dollar surged against counterparts worldwide ranging from Australia’s currency to Turkey’s lira as the Federal Reserve’s signal it is getting closer to reducing monetary stimulus pushed volatility to the highest in a year and spurred losses in carry trades.
The U.S. currency strengthened versus all of its 16-most- traded peers and Deutsche Bank AG’s G10 FX Carry Basket index fell to the lowest level since October as Fed Chairman Ben S. Bernanke yesterday outlined the case for reduced monetary stimulus this year if the U.S. economy keeps improving. India leads carry losses among the 31 most-traded currencies versus the dollar this month with a 4.8 percent decline while its central bank likely intervened to protect the rupee.
“The market is in a shoot first and ask questions later kind of a mode, and you see massive dollar strength, unwind of carry trades,” Eric Stein, a portfolio manager at Eaton Vance Corp. who helps oversee about $17.5 billion of fixed-income assets in Boston, said in a telephone interview. “The Fed has pulled forward volatility.”
The dollar rose 0.6 percent to $1.3213 per euro at 9:30 a.m. in New York, after reaching the biggest two-day gain since July 6, 2012. The U.S. currency advanced 1.4 percent to 97.75 per yen. The Japan’s currency fell 0.7 percent to 129.17 per euro.
The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six U.S. trade partners, gained 0.5 percent to 81.870, reaching its strongest level since June 10.
The JPMorgan Global FX Volatility Index increased to 11.51 percent, the highest level since June 7, 2012. The average in the past year is 8.66 percent. Gold fell below $1,300 an ounce to the lowest in more than 2 1/2 years in New York, exceeding April’s drop into a bear market. Yields on 10-year Treasuries touched 2.47 percent, the highest since August 2011.
Deutsche Bank AG’s G10 FX Carry Basket index gained 6.8 percent in 2012 after declining the previous two years as weak economic data in the U.S., Japan and the euro region led to speculation that central banks would keep rates low and inject money to boost growth. With those conditions waning, volatility has increased, which is negative for the carry trade because it depends on predictable interest rates across jurisdictions.
India’s rupee dropped 1.5 percent to 59.5750 per dollar after depreciating to a record 59.98. South Korea’s won declined to as low as 1,146.55 per dollar, the weakest since July 26, before closing 1.3 percent lower at 1,145.63. The Turkish lira dropped to an all-time low versus the dollar, weakening as much as 1.5 percent to 1.9315.