Dollar index heads for
biggest weekly loss since April on Fed outlook
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[June 20, 2014] By
LONDON (Reuters) - The dollar was under
pressure on Friday, heading for its biggest weekly loss
in over two months against a basket of currencies
following the Federal Reserve's surprisingly dovish
In contrast, the Bank of England's (BoE) hawkish bias was driving
the yield gap between two-year British gilts and U.S. Treasuries
higher, helping the pound trade near 5-1/2 year highs against the
"Sterling is a favorite right now and the BoE seems to be the only
major central bank that is likely to deliver on higher rates," said
Niels Christensen, FX strategist at Nordea.
"The dollar hasn't had a great week after the Fed disappointed some
who had positioned for a slightly more hawkish bias from (Fed chair)
The dollar index edged down to 80.289, not far from a one-month
trough of 80.147. It was down 0.3 percent on the week, its biggest
decline in two months.
Investors sold the dollar after the Fed on Wednesday sounded
comfortable about the outlook for inflation despite recent signs of
a pick-up in price pressure. That dashed some expectations the U.S.
central bank might have to start lifting interest rates earlier than
expected and initially pushed U.S. Treasury yields down.
But data on Thursday showed new claims for jobless benefits fell
last week and factory activity in the mid-Atlantic region
accelerated in June, prompting Treasury yields to reverse higher.
The dollar, though, was still lagging that pick-up in yields,
IMPLIED VOLS CRUSHED
Implied volatilities, a gauge of how sharp currency swings are
likely to be, have fallen further after the Fed meeting.
The Fed and the Bank of Japan are still pumping billions into the
banking system and the European Central Bank will launch new
four-year loans in September. With the global financial system awash
with cash, volatility indices across asset classes have fallen,
supporting riskier assets like stocks and higher-yielding
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The one-month euro/dollar implied vol was at 4.50 percent, close to
seven-year lows and mirroring similar moves in stocks' indices like
the ViX and VSToxx.
The euro was up slightly on the day at $1.3610, not far from a
two-week high of $1.3644 reached on Thursday in the wake of the
Fed's policy outlook.
"The euro looks well supported. The ECB may have eased but that does
not change the fact that the euro zone enjoys a current and trade
surplus. The rest depends on how economic data and U.S. developments
pan out," said Sho Aoyama, senior market analyst at Mizuho
Securities in Tokyo.
Sterling hovered within striking distance of a 5-1/2-year high of
$1.7064 hit on Thursday thanks in part to data that showed UK
factory orders grew at their fastest pace in six months in June.
The robust report highlighted the probability that the BoE could
raise rates well before the Fed.
(Additional reporting by Shinichi Saoshiro in TOKYO; Editing by
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