Dollar Drop as Fed Stays on Hold Spurs High-Yielding Currencies

(Bloomberg) -- The dollar fell against most of its major peers, extending a slide toward its biggest annual decline in seven years, after the Federal Reserve delayed raising interest rates.

The yen dropped from its highest level in nearly a month as traders digested the Bank of Japan’s policy tweak on Wednesday. The Fed decision boosted higher-yielding, emerging-market currencies, with the Korean won and South African rand among the day’s biggest gainers. Norway’s krone was the best performer as the central bank kept its key policy rates unchanged.

Dollar Drop as Fed Stays on Hold Spurs High-Yielding Currencies

Bloomberg’s Dollar Spot Index, which measures the currency against major peers, dropped 0.3 percent, extending its slide this year to more than 4 percent. Fed Chair Janet Yellen, while agreeing that the case for a rate rise had strengthened, argued Wednesday that it made sense to put off a move for now to give the economy more room to grow.

“This should keep global financial conditions relatively easy,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “This is supporting demand for high-yielding currencies against both the dollar and the yen, although we see this as temporary.”

Adjusting Stimulus

The yen slipped 0.3 percent to 100.62 per dollar as of 8:39 a.m. in New York, after climbing earlier to 100.10, the strongest since Aug. 26. It strengthened 1.4 percent Wednesday following the BOJ’s adjustment to its stimulus efforts and the Fed decision to hold rates. Japanese markets were closed Thursday for a national holiday.

Despite Thursday’s decline, the yen is still up 19 percent in 2016, the most among the G-10 currencies, amid speculation BOJ Governor Haruhiko Kuroda’s unprecedented easing is losing its effectiveness.

Norway’s krone gained 2.1 percent to 8.0926 per dollar and 1.6 percent to 9.0993 to the euro, climbing to the strongest level this year. The won jumped 1.6 percent and the rand was up 0.8 percent.

“Expectations for gradual tightening by the Fed and subsequent weakening of the dollar have spurred appetite for higher-yielding assets today, including the won,” said Ha Keon-Hyeong, an economist at Shinhan Investment Corp in Seoul. “Exporters are dumping their dollars as they expect a weaker dollar for some time.”